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Part III Contract Choice of Law Issues, 11 Nominated Bank’s Right of Reimbursement

From: Letters of Credit: The Law and Practice of Compliance

Ebenezer Adodo

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 06 June 2023

Applicable law — Rome I Regulation and choice of law — Letters of credit and damages

(p. 306) 11  Nominated Bank’s Right of Reimbursement

A. Some Background

11.01  In Chapter 10, an examination was made of the Anglo-American courts’ mode of application of their contract choice of law rules to ascertain the law applicable to the beneficiary’s claim for payment under a letter of credit. The focus of this chapter is the manner in which they employ the rules to determine what law governs the right of reimbursement of a nominated bank that has honoured or negotiated a supposedly complying set of documents tendered to it. Consideration will also be given to the related issue of the lex situs of a debt incurred by an issuing bank following its acceptance of documents forwarded to it by a nominated bank pursuant to the terms of the credit.

11.02  We have previously1 noted several shades of the term ‘nominated bank’ as used in banking practice. The present discussion is, however, concerned with the nominated paying bank, in particular a bank authorized by the issuing bank under the terms of a credit to honour the beneficiary’s complying tender of documents either on its behalf or as a confirming bank, or to negotiate or purchase2 the presentation in its own right but without an obligation to do so. In each of these contexts, proper performance of the authorization carries with it the nominated bank’s right to reimbursement of the sum paid out pursuant to the credit, and in many cases includes commission.3 In the normal course of the individual transactions, proper performance is demonstrated by tendering to the issuing bank the documents it honoured or negotiated in compliance with the requirements of the credit.

11.03  Upon receipt of the conforming documents, the issuing bank remits the amount of the credit forthwith if the instrument is sight credit. With regard to deferred payment credit and acceptance credit, however, remittance is due only at a specified date in the future, the shorthand term being the ‘maturity date’.4 Thus if the maturity date, as sometimes happens, is 360 days (p. 307) calculated from a stipulated date,5 then the issuing bank is under no obligation to reimburse the nominated bank until the 360th day arrives.6

11.04  Ordinarily, the buyer, the applicant for the credit in the issuing bank’s country, is the sole party benefited by that clearly substantial waiting period in that it affords the distinct advantage of enabling him to take delivery of the goods shipped pursuant to the credit long before being obligated7 to put the issuing bank in funds to cover the sum named in the credit; but the downside is that it provides him with an opportunity to find fault with the quality of the merchandise (especially if the market has fallen sharply, with no prospect of improvement from all accounts), allege fraud against the beneficiary (who in all probability has already received payment from the nominated bank and justifiably considers the transaction ‘completed’ and ‘closed’, with many of the associated files shredded), and then obtain in a local court an injunction preventing the issuing bank from honouring any reimbursement claim on the credit. When the nominated bank brings an action to enforce the issuing bank’s undertaking, the latter brandishes the court order and asserts that it is excused from liability.

11.05  Whether or not this constitutes a valid and complete answer to the claim is generally determined by what law governs the issuing bank’s obligation to the nominated bank under the credit; if the legal system, the source of the subsisting injunction, does not apply, the defence is doomed to failure. Put more broadly, a court order, a legislative or governmental act would usually furnish an issuing bank with a legal justification for withholding reimbursement inasmuch as the source of the order or act is a legal system that controls the issuing bank’s undertaking to the nominated bank. In practice, the vital choice of law problem commonly encountered in this connection is, therefore, for the forum court to establish what system of law in the eye of its choice of law principles is controlling.

11.06  Very often, this entails choosing from three legal systems, namely, the law of the issuing bank’s country where the authorization to honour or negotiate originates from and where the nominated bank is to present the documents it honoured or negotiated; that of the nominated bank’s locality in which this bank is required by the credit to take up conforming documents delivered to it; and that of the place at which reimbursement is to be effected under the terms of the credit.

11.07  Deciding between these three candidates frequently presents considerable difficulty on account of a multitude of complex policy issues inherently involved. These shall be addressed as they arise in this chapter. But it will be helpful if the respective contexts of the nominated banks as (i) advising bank, (ii) confirming bank, and (iii) non-obligated negotiating bank claiming reimbursement for the money it advanced on the faith of the credit against a tender of documents it examined and thought conforming, are considered separately, particularly (p. 308) because the capacities in which the various banks perform their mandate are not legally identical, and lumping them together may cause unnecessary complications.

B. Advising Bank that has Honoured Documents on Issuing Bank’s Behalf

11.08  An intermediary bank is routinely asked, normally via the text of a credit it receives from the issuing bank and advised to the beneficiary, to honour on behalf of that bank complying documents that may be tendered to it under the credit. As a matter of common business courtesy, if it is not willing to act on the request it has to inform the issuing bank accordingly without delay.8 Usually, however, the advising bank will accept it by conduct, i.e. by honouring the beneficiary’s documents and forwarding them to the issuing bank as directed in the credit. Upon so acting, a contractual relationship between the parties comes into existence. This relation is generally regarded as constituting the advising paying bank an agent of the issuing bank, the principal.

11.09  As agent,9 the advising bank’s act as to both the requirements of the credit relayed to the beneficiary10 and its eventual decision respecting compliance of the documents binds the issuing bank, its principal.11 Importantly, the reciprocal rights and obligations of the parties are primarily embodied in the terms of the credit; and include, as already noted, the issuing bank’s duty to effect reimbursement if the advising bank has properly discharged its mandate.

(1)  The technique adopted in the US

11.10  In the United States, the law governing the issuing bank’s obligation to the advising bank is to be determined by reference to section 5-116 (a) of the Revised Article 5, which requires effect to be given to the applicable law included by the parties in the credit. Now, a credit is often silent on that matter, so the judge is obliged to have recourse to section 5-116 (b). According to this clause, the law of the issuing bank’s location applies. It might be thought that that is an end of the matter, not least as appears from the sub-clause. But it is submitted that it is not. Section 5-103 (c) read in context provides that ‘the effect of [section 5-116 (b)] may be varied by agreement or by a provision’ included in a letter of credit.

11.11  The parties may expressly contract out of the subsection, as for instance where the law of a particular country is selected. Significantly, however, the fact that they have done so may arise by necessary implication from the terms of the credit and the surrounding circumstances (p. 309) which must have been reasonably available to the issuing bank and the advising paying bank at the time the latter honoured its nomination, i.e. at the time of the contract.

11.12  Of course, ascertaining whether in a given case the parties should be taken to have impliedly exercised the right conferred on them by section 5-103 (c) can be quite daunting. But the difficulty is not insurmountable. A possible means of testing if the issuing bank and advising bank presumptively agree the inapplicability of section 5-116 (b) is to identify the possible effects of its application on the reasonable expectations of the parties. If they are such as would defeat the object of their issuer-adviser agency contract relations, then the forum court would be minded to ensure protection of the objectively discernible common intention of the parties and ignore the law selected in terms of section 5-116 (b). It would then search for the law which commercial rationality, convenience, and justice of the case demand; in particular, the law which the parties, as reasonable international bankers, must have contemplated when their contract sprang into existence.

11.13  From the point of view of business common sense, if a person in one country authorizes another person to do something as his or her agent in that country, in the absence of an express stipulation or anything in the circumstances raising an inference to the contrary, both parties are presumed to intend that the act is to be performed in accordance with the local law of that country.12 Accordingly, when an issuing bank qua principal in one jurisdiction invites an advising bank qua agent in another locality to pay on the former’s behalf a specified sum of money against a complying set of documents tendered in that locality, the parties as reasonable business persons, are taken to have intended that the law of the place where the request is to be carried out shall govern the advising bank’s right to reimbursement.

11.14  The basis of this presumption is free from doubt: the very essence of the payment is to assist the issuing bank in fulfilling the necessities of its undertakings to the beneficiary and it is entirely conceivable that the right to reimbursement of the amount paid out will be more adequately and properly protected by the law of the advising bank than that of the issuing bank—with regard to protection, if the other law is applied, as directed by section 5-116 (b), the advising bank would ultimately be at the mercy of the buyer, in that for apparently dubious or unmeritorious reasons he is wont to interfere with the performance of the issuing bank’s reimbursement obligation by procuring local restraining orders. Hence, if the advising bank, as part of safeguarding its interests, had proposed including the law of its locality to govern its reimbursement right at the time the advising bank received the credit together with the request to honour the beneficiary’s conforming presentation, it is extremely unlikely that the issuing bank would have raised any objection.

11.15  Plausibly, therefore, in terms of the object of the invitation extended to the advising bank in the credit and the law which best assures protection to the advising bank’s right, application of section 5-116 (b) would be an outright subversion of the reasonable expectations of the parties. Rather than apply the law of the issuing bank’s location, it is submitted that it is the municipal law at the place of the advising bank that governs their principal-agent relations.

11.16  Ample support for this stance is provided by section 196 of the Restatement (Second) of the Conflict of Laws,13 which lays down general choice of law rules for establishing the applicable (p. 310) law of a contract for the provision of agency services. Considering that the payment made by the advising bank on behalf of the issuing bank against complying documents delivered to it falls into the category of such services, the section is particularly pertinent to the instant matter. According to it, failing an effective expression of choice of the governing law by the parties, the agency contract is under the control of the law of the jurisdiction in which the agent is to render the services. Comment c to the section elaborates on the rationale of the preference for that law as opposed to the law of the principal’s location as follows:

The rendition of the services is the principal objective of the contract, and the place where the services ... are to be rendered will naturally loom large in the minds of the parties. Indeed, it can often be assumed that the parties, to the extent that they thought about the matter at all, would expect that the local law of the state where the services ... are to be rendered would be applied to determine the [substantive] issues arising under the contract. The state where the services are to be rendered will also have a natural interest in [the issues] and indeed may have an overriding interest in the application to them certain of its regulatory rules.

11.17  The extracted provision is simplicity itself. In addition to what we have earlier considered the probable expectations of the parties, a point indicated in the passage just quoted and worth underscoring is the governmental interest of the advising bank’s country in the enforcement of the bank’s reimbursement claim. It can hardly be denied that an issuing bank’s failure to discharge its reimbursement undertaking to the advising bank impinges upon the financial strength of the latter’s country, because the money which ought to be repaid to it and which it would in turn typically put back into the economy is prima facie being wrongfully withheld in the issuer’s location.

11.18  Which state has a potentially overriding interest in the claim in the event that the contracted place of reimbursement differs from the advising paying bank’s country where the services were intended to be rendered? Without doubt, the answer is likely to vary according to whether the one rather than the other is the forum in which the advising bank elects to bring proceedings. Nevertheless, having regard to the need for protecting the ascertained legitimate expectations of the parties, it would be better to give preference to the place of reimbursement agreed by the parties; so, its law should govern the claim.

11.19  An instructive case is the decision of the Supreme Court of New York Appellate Division in Cantrade Privatbank AG Zürich v Bangkok Bank Public Co Ltd.14 In this case, under a credit issued in Thailand, a Zürich-based advising bank honoured the beneficiary’s presentation in the locality and forwarded the documents to the Thai bank for reimbursement. The bank accepted the documents and instructed the presenting advising bank to claim the sum in question from the issuer Bangkok bank branch in New York. Shortly afterwards, a Thai court enjoined payment on the credit. The Appellate Division15 held that ‘since reimbursement under the credit was to take place in New York’, the state’s interest in the claim asserted against the Thai issuing bank was fundamentally implicated, and therefore compelled the application of New York law rather than Swiss, least of all Thai law. The Thai court orders were accordingly ignored, and judgment entered against the issuing bank.

11.20  An important principle enunciated in the Cantrade Privatbank decision is reasonably clear. The law which governs the advising bank’s right to reimbursement under a credit is that of (p. 311) the jurisdiction in which the issuing bank is to effect reimbursement to the advising bank. In the majority of cases, that jurisdiction will coincide with the advising bank’s locality where the parties desire performance of the agency services to occur, of course on behalf of the issuing bank. But where the services are to be carried out in that place, and reimbursement contractually expected in another jurisdiction, the interests of the designated country for reimbursement, together with its substantive provisions of its law would take precedence over those of the adviser’s location.

11.21  The Cantrade Privatbank decision is, however, not without difficulty. In concluding as it did, the Appellate Division appeared to have attached some importance to the circumstance of the issuing bank having accepted the documents before the restraining orders were given by the Thai court. Six years later, that consideration went to furnish the principal basis for Justice Helen Freedman’s ruling in Banco Amazonas SA v BNP Paribas (Suisse).16 Banco Amazonas, an Ecuadorian bank, brought an application in New York for summary judgment on a standby letter of credit authorizing reimbursement at a New York bank. BNP Paribas, a Swiss issuing bank, had countermanded that authorization and rejected Banco’s apparently complying presentation owing to a subsisting injunction issued by a Geneva court freezing the credit. Holding that ‘the Swiss injunction is probably entitled to recognition by this court, and likely immunizes Paribas from any liability for’ non-payment of the credit, the judge said: ‘In Cantrade Privatbank, the Thai court enjoined the issuing bank after it had already accepted the documents that immediately triggered its obligation to pay. By contrast, the Swiss court enjoined Paribas more than five weeks before Banco Amazonas presented it with a conforming demand for payment’.17

11.22  Taken in context, the forum has no governmental interests in the claim if the issuing bank was yet to receive the advising bank’s complying presentation at the time the orders enjoining payment under the credit were issued; but it will have such interests if by that time acceptance or, at the very least, receipt of the documents, had already been advised. It is suggested that this approach unduly ignores the contractual significance of the stipulation in the credit nominating New York as the place where the claimant advising bank was to be reimbursed the sum on the credit and, therefore, unsound. The fact that an issuing bank has accepted or is still to communicate acceptance of a presentation by the advising paying bank should be treated as irrelevant to the contractual effect of the stipulation in the credit for reimbursement in New York. Consequently, the feature which Justice Freedman regarded as distinguishing Cantrade Privatbank from Banco Amazonas and attached decisive importance to, had no real bearing on the matter for decision, so the court ought to have granted the bank’s reimbursement claim in Banco Amazonas.

(2)  Attitudes of the common law and Rome I Regulation

11.23  We have so far been dealing with the American case law. Let us turn to the position at common law and under the Rome I Regulation.18 As earlier seen, the advising bank’s contractual right to reimbursement of the payment it has made on behalf of the issuing bank under a (p. 312) credit is essentially the same as that of an agent claiming commission under a contract of agency. In consequence, the choice of law principles to be employed to determine the governing law of the advising bank’s right of reimbursement are those generally applicable to agency contracts by virtue of decisional law and pursuant to the Regulation.

11.24  At common law, the rule is that insofar as the contract does not include a provision indicative of its governing law, the respective rights and obligations of the parties are as defined by the law of the country where their relationship as principal and agent is created,19 perhaps as opposed to the place at which the agency services are to be rendered. The ground for choosing the locus contractus is far from self-evident in decisional law, albeit the choice has roots reaching back to remote antiquity.20 Just as its value seems to have received no significant challenge in connection with agency contracts generally, application of the rule to the relation of advising paying bank and issuing bank should be free from controversy.

11.25  The common law rule, read in context, dictates that if the letter of credit creating the advising paying bank and issuing bank agency relations lacks governing law (noted previously to be typically the case in credits), ascertainment of the place where that relationship crystallized into a contract holds the key to the applicable law of the reimbursement claim. It is needless to belabour the point already made, that the agency contract usually springs into being the moment the advising bank acts on the issuing bank’s request set forth in the credit by examination of the beneficiary’s documents and, if found to be in apparent good order, acceptance of them; mere receipt and checking of the documents for conformity with the requirements of the credit without honouring them in the stipulated manner does not itself generate the contract.

11.26  It follows therefore that in the eye of common law the legal system governing the advising bank’s right to reimbursement is that of its locality, being the place where the agency contract came into being. Application of the Rome I Regulation would lead to the same conclusion, but by a different route. As an initial matter, to the extent that Article 3 (1) is inapplicable to the credit because the parties have not exercised their choice of the governing law, one has to consider whether the agency contract sought to be enforced by the advising paying bank falls into any of the contracts listed in Article 4 (1) (a) to (h). If so, the applicable law is to be determined by the rule there specified for the contract. Consistently with that general formula, a trawl through the list of particularized contracts reveals Article 4 (1) (b) as covering the adviser’s reimbursement claim, because it arises out of a contract for the provision of services: the advising bank, in taking up the beneficiary’s documents, is primarily providing a service to the issuing bank.21 By virtue of the sub-article,22 the applicable law of the contract is the law of the country where the service provider is located. The issuing bank’s contractual obligation to reimburse the advising bank is therefore governed by the advising bank’s law.(p. 313)

11.27  It seems reasonably clear that in determining the governing law of the advising bank’s reimbursement claim, the common law choice of law rule looks at the place at which the adviser accepts documents in compliance with the terms of the credit, whilst Article 4 (1) (b) of the Regulation regards as conclusive the location of the adviser. These tests are particularly significant not only because their application would normally produce the same result, but also because they are simple and should be easy to apply, even in many complex cases such as transferable letters of credit.23

11.28  By way of illustration, take a credit of the sort covering a shipment of Bonny light sweet crude oil opened in China in favour of a London beneficiary, with a portion of the credit transferred by the advising bank in London to a second beneficiary in Nigeria, the country where exportation of the goods will take place. In accordance with the first beneficiary’s request,24 or more precisely the terms of the credit, the advising bank remits payment to the second beneficiary’s bank in Lagos, and credits the balance to the first beneficiary’s account maintained with a designated London bank. Within a reasonable time afterwards, the advising bank delivers the documents it took up from both the first and second beneficiaries to the Chinese issuing bank for reimbursement of the sum on the prime credit. To the question ‘whose jurisdiction’s law applies to the advising bank’s right of reimbursement?’, common law and the Rome I Regulation afford a clear-cut answer: it is the law of the advising bank’s country, England. For reasons already argued in relation to the position in the United States, if under a particular credit the adviser is empowered to demand reimbursement in some country different from its own (England in the present case), it is suggested that the law of that other country, rather than the law of its location, is to be applied to the adviser’s potential dispute with the Chinese issuing bank.

C. Confirming Bank’s Claim for Reimbursement under a US Jurisdiction

11.29  So far as the cases shortly to be considered go, a search for the governing law of the confirming bank’s claim for reimbursement from the issuing bank under a credit is far more complex than the preceding situation. Where the confirming bank brings the credit before an American court to enforce it, a threshold step the judge would take is to consider whether the choice of law rule in section 5-116 (a) of the Revised Article 5 as adopted by the forum’s legislature applies. Fundamentally, the section as concerns the present claim articulates, first, that the ‘liability’ of an issuing bank to a confirming bank ‘is governed by the law of the jurisdiction’ set forth ‘by a provision in the letter of credit’ and, second, that the ‘jurisdiction whose law is chosen need not bear any relation to the [letter of credit] transaction’.

11.30  An occasion to determine the correct legal meaning of those sub-clauses in the particular context of litigation initiated by a confirming bank against an issuing bank arose in Banco (p. 314) Nacional de Mexico SA v Societe Generale.25 The claimant confirming bank, BN, sought reimbursement in the New York County Court of some US$36 million it paid out in Mexico to Mexico Federal Electricity Commission, CFE, the beneficiary of a standby letter of credit issued in France by the defendant bank, SG, to secure due and faithful performance by Alstom and Rosarito (AR) of their obligations under a contract for the construction of a power plant in Mexico City. Owing to certain orders obtained by AR from Mexican courts purporting to prohibit payment ‘to anybody’ on the credit, SG refused to reimburse BN. Significantly, however, the credit expressly stipulated for New York law as its governing law.

11.31  Justice Richard B Lowe III recognized that the credit was, by its very explicit choice of law clause ‘governed by the UCP 500 and to be interpreted under New York law’, but nevertheless viewed the whole question of whether the foreign orders constituted a proper basis for SG’s non-performance of its obligation to reimburse BN as turning on ‘the existence of a sufficient nexus’ between New York and the parties’ transaction. Concluding that the requisite connection was non-existent because the credit did not require reimbursement to take place in New York,26 the judge dismissed BN’s claim.

11.32  The Appellate Division reversed this decision and ordered SG to reimburse BN with interest,27 pointing out, quite correctly, that the lower court made a serious ‘error’ in ignoring the provision of section 5-116 (a) of Revised Article that requires application of the law included in a credit, irrespective of the absence of any relationship between the credit and the country to which that law belongs. Obviously the first instance court misapprehended the reach of the power which the subsection gives banks entering into engagements under a letter of credit to choose the law governing the facility. The misapprehension arose most probably because it directed its attention to the related general choice of law provision in Uniform Commercial Code Article 1-105 (1) which denies such freedom to contracting parties. The upshot is that the section 5-116 (a) directive means what it says when a credit explicitly carries its applicable law.

11.33  With the Appellate Division’s ruling, it is reasonable to expect that there will be no further misunderstanding. On the other hand, cases of the instant sort would be decided in the same way under the common law choice of law principles and the Rome I Regulation, since they both require that the forum court utilizing them has to give effect to whatever law is expressed in the credit28 unless any of the few well-known exceptions29 applies.

11.34  To this extent, the position as to the governing law of the confirming bank’s claim for reimbursement from the issuing bank under a credit is perhaps unexceptional. Quite disappointingly, however, in practice such a letter of credit expressly bearing its governing law as (p. 315) did the credit we saw in Banco Nacional is the exception, not the rule. Thus, when the credit under which the confirming bank seeks enforcement of its rights is of the normal type, different rules, principles, and considerations battle for application.

11.35  Under Revised Article 5, the basic choice of law rule is in section 5-116 (b) and provides that the liability of the issuing bank to reimburse the confirming bank for payment made pursuant to the credit ‘is governed by the law of the jurisdiction in which the issuing bank is located’.30 The literal effect of this provision is startling. As the provision stands, and because by virtue of the other portion of the subsection the confirming bank’s obligation to the beneficiary or other nominated bank such as a non-obligated negotiating bank is to be determined by the law of the confirming bank’s place of business; and the confirming bank is ordinarily in the same country as its obliged beneficiary or non-obligated nominated bank, while the issuing bank is in another country. Inevitably, therefore, the confirming bank may be obligated to make payment according to the law regulating its undertaking to the beneficiary or negotiating bank, but not entitled to reimbursement of the money it has been compelled to pay out according to the law governing its right against the issuing bank.31

11.36  In strict commercial terms and as a matter of contract interpretation, section 5-116 (b) in relation to the confirming bank-issuing bank contractual relations, raises the question whether its bare signification is a justifiable legal meaning of the subsection. The UCP and Revised Article 5 make it plain that confirming banks have the same degree of payment or reimbursement obligation as issuing banks under credits. However, the confirmer characteristically assumes the undertaking for an extremely small commission and without any security in support, except the documents representing the goods and the issuer’s promise of reimbursement, whereas the issuing bank typically has as security for the performance of its engagement the credit balance or other assets of its customer, the credit applicant. With these commercial realities in mind, how can it be reasonably supposed that a rational and prudent confirming bank, if asked, would agree to run the twofold risk of being required by the law of its location to honour a tender of documents which that law considers complying, and the risk of the law of the issuing bank’s country precluding reimbursement because in the issuer law’s view, the confirming bank’s right to realize the credit is invalid? The result of imputing such agreement to the confirmer is so commercially unreasonable that the subsection cannot properly be taken as applicable to the confirming bank and the issuing bank contractual relations. Section 5-103 (c) of the Revised Article 5 provides an acceptable means of reaching that conclusion; upon further examination, we would be able to find that it is the law of the jurisdiction in which the confirming bank is to discharge its obligation contained in the credit which ordinarily governs its right to reimbursement from the issuing bank. A little later it will be necessary to elaborate on the commercial undesirability of attributing to the parties, as just and reasonable bankers, a mutual intention to submit to the law at the issuing bank’s locality.

11.37  Worthy of immediate attention is the source of section 5-116 (b), which may help to shed light on its true meaning and effect so far as concerns the prevailing approach to construction of commercial contracts. Conception of the section dates to a recommendation made in a report by the American Bar Association Task Force published three years after a (p. 316) comprehensive revision of the old Uniform Commercial Code Article 532 began on 12 April 1986.33

11.38  In the material portion of the Report,34 the Task Force shared our view already expressed, namely that the lack of a governing clause is typical of letters of credit. It then said: ‘Nearly all credits that contain a choice of law clause choose the law where the issuer is located, which is also the law that would apply to the issuer’s performance of his letter of credit engagement if section 4-102 (2)35 ... were applied directly or by analogy. By extension ... the undertaking of the confirming bank would be governed by the laws of [its location]’.36 The Task Force further argues that on account of ‘inconsistent’ judicial rulings on this aspect of conflict of laws problems, many of which rulings tend to ignore the peculiar nature of letters of credit, ‘[l]etter of credit law would be well served by’ codifying choice of law rules suitable for the unique character of the issuer’s and confirmer’s engagements under a credit. The Report concluded by offering two options: If it is desired that ‘such rules be consistent with section 4-102 (2) ... then, in the absence of an express choice, the law of the place of issuance should apply to the issuer’s obligation to honour the credit’ (“Option A”), and the law of ‘the place of authorized confirmation should control the confirmer’s obligation to honour’.37 But if ‘greater weight is to be given to the desirability of applying only one law to the [issuer’s and confirmer’s undertakings], then, in the absence of an express choice, the law of the place where the credit is made available by payment, acceptance or negotiation against presentation of documents should apply’ (“Option B”).38

11.39  As appears from section 5-116 (b), the Revised Article 5 Drafting Committee39 voted in favour of Option A proffered in the Task Force Report. On the pertinent parts of this report quoted earlier, two observations arise. First, it may well be true that ‘nearly all credits’40 which make provision for the governing law select the law of the issuing bank’s location in relation to domestic letters of credit. However, if the Task Force thought the same can be said of international letters of credit opened outside the US, its assertion must be inaccurate. How many prudent American banks, imbued with safe and sound banking practice, would be (p. 317) comfortable with adding their confirmation to letters of credit issued in a country carrying a baggage of high credit and political risks when the letter of credit has the law of that country as the applicable law? There can be no commercial reason why one should find it surprising that the potential confirming bank usually treats such a credit with considerable suspicion and would refuse to confirm it. It is virtually impossible to imagine a foreign issuing bank rejecting a US bank’s proposal of the law of a US state as the governing law of the credit sought to be confirmed and transmitted to the American exporter beneficiary.

11.40  Second, the analogy thought to exist between, on the one hand, the issuer’s and confirmer’s undertakings under a letter of credit and, on the other hand, the collecting bank’s obligations with regard to the handling of a collection, which analogy recommends ensuring potential choice of law rules applicable to the undertakings be ‘consistent with’ those enacted for bank collections, is unsustainable. Since when did the essential legal position of the issuer and confirmer under a credit become respectively comparable to that of a collecting bank and remitting bank under a collection? As a matter of general principles, the rights and obligations of parties to a collection transaction are universally known in the banking world to be fundamentally different from those a credit customarily generates.41 Unlike the issuer and confirmer of a credit vis-à-vis the beneficiary and other persons entitled to enforce the instrument, a collecting bank42 is an agent of the remitting bank,43 and owes no statutory44 or common law45 obligations to the party, i.e. the seller, from whom the remitting bank receives the collection instruction.46 Moreover, as between a collecting bank and the remitting bank, section 4-102 is perfectly justified in laying down that the law at the former’s location governs their relations, for, in general, as we saw in the course of the preceding discussion, the relation of principal and agent is governed by the law of the agent’s place, being the location (p. 318) where the agency services are typically performed. But as between the issuer and confirmer, one would be standing a settled principle on its head to maintain that the former is agent of the latter, and vice versa;47 so, there is nothing connecting this context with that for which the section 4-102 choice of law rule is designed.

11.41  Certainly, as the Task Force Report itself points out, the main reason for inconsistent decisions in this area of letter of credit law48 in the US has been the courts’ failure to take cognizance of the ‘peculiar nature’ of the banks’ undertakings embodied in a credit. Quite ironically, this failure, as just noted, is also exemplified by the controversial and extraordinary analogy drawn in the Task Force Report between credit undertakings and, on the other hand, obligations arising under collection instruction. Accordingly, it is believed that had the Task Force adequately appreciated the unique necessities of the letter of credit device, they would have properly prioritized matters in recommending Options A and B; which might have been accomplished by according due weight to the desirability of applying to the commitments of the issuer and confirmer the law of the place where the confirmer is to honour its undertaking upon its receipt of complying documents. Viewed overall, the solution to the problem before the Task Force primarily invited recommendation of Option B. The alternative option which eventually found its way into section 5-116 (b) was, quite clearly, unwarranted.

11.42  Fairly regarded, therefore, the section 5-116 (b) choice of law rule for the confirming bank’s right to reimbursement from the issuing bank can place the unwary American confirmer at a disadvantage in respect of claiming recoupment from the issuer. It is not too much to expect that when the opportunity presents itself to the legislature in the not too distant future, an amendment to the provision will bring in Option B. But until then, is there an escape route from the difficulties that are almost certain to arise upon applying it to the issuer and confirmer relations?

11.43  It is reassuring that the key to the problem is in substance articulated in section 5-103 (c). This section allows the court to disregard section 5-116 (b) if the effects of its application would defeat the ostensible contractual expectations of the issuer and confirmer. The disregarding of the sub-clause, it is submitted, would point to the mentioned applicable law that the Task Force had in its report proposed for inclusion in the Revised Article, save that if the confirming bank is expressly or impliedly entitled to be reimbursed in a jurisdiction different from its location, then the law of that jurisdiction would displace the initial law pinpointed. These suggested choice of law rules are not without significance: they are a creature of case law and uniformly prevailed throughout the courts in the United States prior to the time section 5-116 (b) gained statutory status.49

(p. 319) D. Confirming Bank’s Claim at Common Law or under Rome I Regulation

11.44  In contradistinction to the American context, there can be no uncertainty about the choice of law rules to be applied in determining the law controlling the confirming bank’s claim against the issuing bank at common law and under the Rome I Regulation. Rather, it is on the method to be employed in applying them that a significant difference of opinion can occur.

(1)  Introduction

11.45  With regard to common law, in the absence of an express or implied choice of the governing law in the credit, the relevant question to be determined by the judge before whom the claimant confirming bank’s claim comes is, with what system of law does the issuing bank’s reimbursement undertaking to the confirming bank under the credit have its closest and most real connection? On this question, the general approach adopted by the judges50 has been to choose the law of the confirming bank’s location (being the law presumptively governing its obligation to the beneficiary or a nominated negotiating bank) rather than the law of the issuing bank’s country. Several commentators, including Professors Struycken51 and Jonathan Hill,52 albeit in the context of statutory regime(s),53 have disputed the correctness of that selection and would prefer to have the alternative law applied. But the courts retort, somewhat testily, that ‘very great inconvenience would arise if the law of the issuing bank’ governs;54 in particular, the confirming bank would face a ‘wholly undesirable multiplicity of potentially conflicting laws’.55 However, critics56 point out that the courts’ preference merely shifts the alleged inconvenience or difficulties from the confirming bank to the issuing bank in that its credit-opening agreement with the applicant for the credit is often controlled by the local law of the issuing bank. Practitioners,57 whose sympathies obviously lie with the judges, suggest materially that: ‘The ultimate solution is in the hands of the issuing bank: in (p. 320) drawing up the application form upon completion by the applicant, it is up to it to ensure the law of the potential confirming bank’s country is expressly included in the eventual agreement’.

11.46  Regrettably, in practice, credit opening agreements seldom follow the practitioners’ advice. Primarily, banks opening a credit have grown accustomed to incorporating their local law in the credit-opening agreement as the applicable law.58 Of course, old commercial habits of this sort die hard. In consequence, the possibility of the issuing bank potentially confronting multiple governing laws remains a common feature of modern letters of credit litigation in this area.

11.47  The crucial issue which arises for consideration, and on which strongly divergent views are held, is therefore whether the inconvenience and difficulties that may result from the spectacle of the credit-opening agreement being subject to the local law, while the issuing bank’s reimbursement engagement to the confirming bank under the credit is presumptively governed by the substantive law of some other country, is necessarily unacceptable to the issuing bank. In other words, which bank, issuer or confirmer, is in a better position to cope with the troubling incident of the conflicting varieties of laws? This issue is best examined by elaborating on the considerations as to what would serve the parties’ best interests and expectations as well as the peculiarities and needs of the confirmed credit transaction; some have been highlighted in our discussion of the American context. Once we have carried out that task, it will become clear what law should apply to the confirming bank’s claim for reimbursement from the issuer at common law and under the Rome I Regulation.

(2)  Underlying considerations determining the law controlling the confirmer’s claim

11.48  Basically, examination of the question is the key component of establishing, in the eye of the common law choice of law, the legal system with which the contract between the issuing bank and the confirming bank is most substantially connected. It involves taking a broad view of their contractual relationship and the purpose of the contract, and applying the objective test of the reasonable business person to apportion relative weight to the various elements and the circumstances of the transaction reasonably known to the parties at the time of contracting.59

11.49  Matters of great importance which would normally have their seat in the confirming bank’s country include: the confirming bank’s assumption of an irrevocable obligation to honour a conforming tender of documents under the credit by reason of the mandate conferred on it by the issuing bank; and its due performance of that obligation to the beneficiary or another nominated bank in its locality or in a different country. On the other hand, following the discharge of its obligation, the place where the confirming bank has to make a complying (p. 321) presentation of the documents it has taken up so as to become entitled to reimbursement is usually the issuing bank’s counter.

11.50  It would appear that the weights of the above factors are evenly dispersed. Although two are pointing in the direction of the law of the confirming bank’s country, and one in that of the issuing bank, neither of them, standing alone, is determinative as to what legal system the parties must be reasonably presumed to have intended to govern their relations. (It is this feature that distinguishes the present situation from the case of ascertaining the governing law of the beneficiary’s claim for wrongful denial of payment, which has been examined elsewhere.60) It might be thought that the choice is simply between the two laws, namely, issuer’s and confirmer’s. Quite often, however, there may be two others in a particular case viz the law of the country in which the confirming bank has been obliged by the terms of the credit to pay the beneficiary or reimburse a nominated negotiating bank, and of the place at which the issuing bank promised in the credit to reimburse the confirming bank.

11.51  Which of the four legal systems would the issuer and confirmer as just and reasonable bankers have intended had they decided to settle the matter at the time when they made their contract?61 Surely, the law which is most convenient for both the parties and more likely to give efficacy to the contract will be uppermost on the hypothetical business person’s mind. In order to determine which law fits the bill, it is worthwhile to look closely at the commercial realities of the banks’ positions following the establishment of the credit.

11.52  An infinite variety of risks attach to the smooth workings of the instrument, especially on the side of the issuer’s country. An existing statutory provision may empower local courts to restrain payment on the credit on the ground of an allegation of fraud involving the sales contract or other transaction underlying the credit, an eventuality which prima facie raises questions about the integrity of the beneficiary rather than the confirming bank’s bona fides; foreign exchange controls may prevent or unduly delay the release and transfer of funds covered by the credit;62 import restrictions may be imposed by that country after the sales contract between the buyer and seller has been agreed, the requisite letter of credit put in place, the goods shipped, and payment made by the confirmer to the beneficiary; supervening political developments resulting in strained relations between the respective countries of the banks may tempt the issuer’s country into passing legislation purporting to discharge the issuer’s obligations created by the credit.

11.53  In these circumstances, if the confirming bank’s right to reimbursement is presumptively subject to the law of the issuer’s location it would inevitably mean putting the confirmer at greater risk than both the issuer, whose obligations, as noted earlier, are in any event adequately collateralized, and the beneficiary. Moreover, as to the latter party, if the confirmer’s undertaking to the beneficiary is held subject to the issuer’s law, the beneficiary will have no protection and the distinctive attributes of the credit as a means of effecting prompt and assured payment would be destroyed.(p. 322)

11.54  Accordingly, to accept the argument that the confirmer’s right could or should be presumed governed by the law of the issuer’s location would be to impute an entirely unreasonable intention to the issuer and confirmer. This conclusion sufficiently puts that law out of the reckoning, so we are left with three different laws. Traditionally, the courts are firmly wedded to the notion that the confirmer’s location is invariably where it has to perform its undertaking to the beneficiary and that the law there governs its reimbursement claim against the issuing bank.63 By emerging practice, however, the country in which the confirmer is located may well be different from that of the beneficiary. Between these locations, the confirmer’s country is not really a strong connecting factor. If any doubt exists as to this assertion, it would be removed by a consideration of the Marconi case.64 In this case, the issuer and confirmer were located in one country, Indonesia, while the place at which the credit contemplated payment to the beneficiary was England. In Potter L.J.’s view expressed obiter, there was a strong case for Indonesian law to govern the confirmer’s contract with the issuer, since the banks were both at the same place, but the confirmer’s relation to the beneficiary was nevertheless subject to English law. In effect, the confirmer was being exposed to the very same difficulties against which it has traditionally been considered necessary to shield him. Potter L.J.’s observation is therefore not easy to support.

11.55  Such an evidently invalid result is certainly indicative of the problem which could arise if too much weight is accorded the confirmer’s location as a connecting factor. Consequently, the confirmer’s law falls away. Now, putting aside for later consideration the law of the place at which the credit requires the issuer to effect reimbursement to the confirmer, it must be asked: if a reasonable and prudent confirming bank stipulates in the credit at the time of contracting that its right to reimbursement should be under the control of the municipal law of the country in which its undertaking to the beneficiary of the credit is to be discharged (i.e. the place of availability of the credit), is there any legitimate commercial reason why the reasonable issuer would reject the stipulation? It can scarcely be doubted there is none. Indeed, he would readily accede to it to encourage the confirmer to add its confirmation to the credit. If consent is nevertheless unreasonably withheld, thereby leading to non-issuance of a confirmed letter of credit which the applicant for the credit promised to put up in favour of the potential beneficiary within the period of time prescribed under the sales transaction or contract for the provision of services, the issuer may incur liability to the applicant under the credit-opening agreement.65

11.56  The argument just advanced is abundantly illustrated by the courts’ approach to the determination of the law governing a counter-guarantee66 in the absence of the parties’ expression of (p. 323) their choice of the law. There are two cases to consider briefly: the first is Turkiye Is Bankasi v Bank of China,67 and the other is Wahda Bank v Arab Bank Plc.68

11.57  In Turkiye Is Bankasi v Bank of China, the claimant bank, TIB, issued six performance bonds in favour of ETA, a Turkish entity, at the request of the defendant Chinese bank, BC. In consideration of TIB doing as desired, BC gave a counter-guarantee under which it undertook to pay BC upon receipt of BC’s written demand stating that BC had been called upon by ETA to make payment under the bonds. Philips J. had to decide, as a preliminary question, the proper law of the counter-guarantee contract TIB sought to enforce. The contract made no express provision for its governing law but, on the evidence, the judge, applying the second limb of the common law choice of law formulas, noted that the texts of the counter-guarantees were an adaptation by BC of a specimen letter of guarantee which TIB had advised that it commonly used in light of Turkish legislation. It was accordingly held that the parties had implicitly agreed that the counter-guarantees were subject to Turkish and not Chinese law.69

11.58  The judge, however, arrived at the same conclusion on the alternative basis that the counter-guarantee contracts had their closest and most real connection with the Turkish legal system. It had been contended for the defendant that the contracts had closer contact with Beijing because it was the place where the payment undertaking they embodied was to be performed by BC. Rejecting this contention, Philips J. stressed that the crucial element was the intimate connection between the counter-guarantees and the performance bonds that were issued in Turkey to a Turkish beneficiary and admittedly governed by the Turkish system of law.

11.59  For present purposes, the most that can be gathered from the ratio of the case is that, in the overall scheme of things, greater importance is to be attached to the causal connection between the counter-guarantees and the performance bonds rather than the place of performance of BC’s obligation under the counter-guarantees. The justification for allocating greater weight to that factor was not illuminated.

11.60  This was implicitly addressed some fifteen months later in Wahda Bank v Arab Bank Plc. The facts were that a Libyan bank, WB, sought summary judgment for the amounts of a number of counter-guarantees that had been given to them by the defendant bank, AB, located in London in consideration for certain performance bonds it issued in Libya in favour of a Libyan government agency. AB urged that the counter-guarantee contracts were governed by the law of Libya and by that law it had arguable defences to WB’s claim; in particular that payment is only due on a proof of default, and not on a first demand basis, and it should therefore be granted leave to defend the action. WB responded by asserting that English law applied and under this law AB had no arguable defence.

11.61  The threshold question thus turned on the proper law of the contracts. Clarke J., giving judgment for AB, regarded as a ‘compelling consideration’ the object of the counter-guarantees, (p. 324) namely, to provide protection to WB upon issuing the requisite performance bonds.70 The natural expectation of both parties must have been that the law which governed WB’s liability to the beneficiary of the bonds would also govern AB’s liability to WB under the counter-guarantees so as to ensure there was no risk of WB being liable on the performance bonds but not entitled to have the protection promised in the counter-guarantees.

11.62  The Court of Appeal dismissed WB’s appeal.71 Staughton L.J., speaking for the court, expatiated on the factor which Clarke J. rightly treated as decisive as follows:

A banker who issues a performance bond for a tiny commission will want to ensure that he takes no greater risk than the solvency of the bank putting up his counter-guarantee. He will want to ensure that his right of reimbursement is back-to-back the same as his liability; and a banker who instructs another bank to issue a performance bond ought to, and in my view would, readily agree to that. Hence it is that in the absence of any express choice I can infer without any doubt that the parties intended the counter-guarantees ... to be governed by the same law as governed the performance bond.72

11.63  Drawing parallels between the instant situation and a confirming bank vis-à-vis an issuing bank under a letter of credit, the judge said: ‘When one bank issues a letter of credit and instructs another bank to confirm it ... the confirming bank will wish to be sure that its right of reimbursement is, back-to-back, the same as its liability. It will wish to ensure that it takes no risk other than the solvency of the bank that is going to reimburse it’.73

11.64  Looking at those expectations, Staughton L.J. concluded, albeit apparently approving Mance J.’s dictum in Bank of Baroda v Vysya Bank Ltd,74 that it would be wholly anomalous if the system of law governing the confirming bank’s undertaking to the beneficiary were not to govern its right to reimbursement against the issuing bank.

11.65  It may be objected that, by virtue of the autonomy doctrine, the confirming bank’s contract with the issuing bank is autonomous of the confirming bank’s contract with the beneficiary, and a counter-guarantee contract is independent of a performance bond it generates, so that they are amenable to separate legal systems. It is important to point out, however, that the contracts are treated as autonomous of one another in the sense that the obligation to honour a demand for payment under each contract is conditional on the conformity of the demand with the terms of the contract and not on anything else outside of those terms. Insofar as concerns the question of the governing law of the various contracts, the autonomy rule is of little significance.

11.66  Instead, it is the commercial realities of the causal relationship between the contracts that hold sway. Without a counter-guarantee, the performance bond will not be issued. A confirming bank’s obligation to the beneficiary is similarly created on the issuing bank’s instructions. To that extent, the counter-guarantee and the confirming bank-beneficiary contracts are respectively ancillary to the performance bond and issuing bank-confirming bank contracts. For reasons of commercial convenience, admirably explained by Staughton L.J. in the passages already quoted, and in the absence of an express or implied choice of law, (p. 325) it is submitted that the collateral contracts are to be treated as having their closest and most real connection with the law of the relative contracts to which they are ancillary75 unless, in the circumstances of the particular case, there are special reasons why such characterization is inapplicable.

11.67  Arguably, the principle thus applied is the so-called doctrine of infection. Viewed broadly, application of the precept will often require ascertainment of what intention should fairly and reasonably be imputed to the parties, taking into account the nature of the contract and the circumstances in which they dealt.

(3)  Application of Article 4 of the Rome I Regulation to the confirmer’s claim

11.68  The key considerations we saw earlier will significantly apply in ascertaining the governing law of the confirming bank’s right of reimbursement under Article 4 of the Rome I Regulation. Before examining the extent to which they do so, the confirming bank-issuing bank contract has to be characterized. This is because, to apply Article 4 in default of an express or implied selection of a law in a contract, an initial step is to determine whether the contract is covered by a particular sub-paragraph under Article 4 (1); if it is not, then one proceeds to Article 4 (2), which prescribes that the contract shall be governed by the law of the country where the party required to effect the characteristic performance of the contract is located. Nevertheless, Article 4 (3) states that ‘[w]here it is clear from all the circumstances of the case that the contract is manifestly more closely connected with a country other than that indicated in [Article 4 (2)], the law of that other country shall apply’.

11.69  In the leading decision of Bank of Baroda v Vysya Bank Ltd,76 after quoting in extenso the provisions of Articles 10 (b)77 and 11 (d)78 of the UCP 400,79 Mance J. defined the relationship between an issuing bank and a confirming bank as an agency contract, though as against the beneficiary the confirming bank commits itself as principal;80 and added that the language and request used in those articles81 gave credence to his view. The validity of the court’s characterization of the legal relations between the issuing bank and confirming bank simply as a contract of agency is, however, to be doubted.82(p. 326)

11.70  In principle and on authority, there is a fundamental distinction between the legal consequences which arise when an intermediary bank adds its confirmation to a credit at an issuing bank’s request and those that arise when a confirming bank honours its obligation under a credit and then seeks reimbursement from the issuing bank. In the former case, a contractual relationship springs into existence the moment that the intermediary bank adds the required confirmation. Without doubt, the adding of its confirmation to the credit constitutes the intermediary bank an agent of the issuing bank. But it is often not properly appreciated, as did the court in Bank of Baroda, that the scope of the agency contract thus created is very limited, as are the reciprocal obligations of the parties under it. In particular, the confirmer’s agency duties are much the same as those of an advising bank and are expressly articulated in Article 9 (b) of the UCP 600.83 If its services are duly rendered, it is entitled to a specified or reasonable commission normally from the issuing bank, though it is sometimes charged to the amount of the credit for the beneficiary’s account. At all events, under the agency contract the cause of action the confirmer can possibly have against the issuing bank is a claim for such remuneration, which claim has unsurprisingly never been known to form the basis of a lawsuit because the sum involved is usually very small and duly paid.

11.71  In the latter case where a confirming bank has honoured or negotiated a presentation and then tenders the documents to an issuing bank for reimbursement, it does not claim as agent, but as principal in its own right. In this connection, referring to a negotiating bank under a confirmed credit in the litigation raised by that bank against an issuing bank in European Asian Bank AG v Punjab & Sind Bank (No. 2),84 Robert Goff L.J. delivering the judgment of the Court of Appeal stressed that ‘the plaintiffs cannot be regarded as an agent of the defendants; nor can a negotiating bank be regarded as an agent of an issuing bank’.85 Notably, those observations were made some twelve years prior to December 1993 when Bank of Baroda was decided. Nevertheless, after that year, as the negotiating bank in the Bank of Baroda case was a confirmer and that in European Asian Bank was not, it might have been argued that the characterization adopted in Bank of Baroda was correct. In 2000, Sir Christopher Staughton in the Court of Appeal in Credit Agricole Indosuez v Muslim Commercial Bank Ltd86 was effectively refuting such an argument when he said that ‘there is not in law an agency relationship between an issuing and a confirming bank’.87 In a similar vein, and remarkably within the same period, the apex court of Singapore ruled in Credit Agricole Indosuez v Banque Nationale de Paris88 that a confirming bank that negotiates or discounts a beneficiary’s documents and presents them to the issuing bank for reimbursement under a negotiation credit is not acting (p. 327) as an agent of the issuing bank, least of all the beneficiary.89 Instead, it acts in its own right in pursuance of its own business.90

11.72  As matters stand today, the salient feature of the relation of an issuing bank and a confirming bank is not the agency contract; rather, it is the issuing bank’s engagement to honour the confirming bank’s complying presentation of documents. In point of fact, whereas the issuing bank’s obligation to pay commission for the confirming bank’s agency services is not covered by any edition of the UCP, including the current version (the UCP 600), its undertaking to effect reimbursement once the confirming bank has honoured or negotiated documents within the terms has been the very essence of the rules since 1933.91

11.73  If this analysis is properly considered and accepted, then it must follow that, contrary to conventional assumption maintained in the existing literature, Mance J.’s dictum in Bank of Baroda appears irreconcilable with the quite considerable sequence of dicta just noted. Strictly speaking, the observation in Bank of Baroda can only be correct if the long line of uniform authorities is wrong. Notably, the agency services (i.e. the confirmation of the credit and transmission of it to the designated beneficiary) rendered by the confirming bank do not characterize the issuing bank-confirming bank contract. What defines it is reimbursement by the issuer of the sum on the credit upon its receipt of a complying set of documents from the confirmer. Accordingly, the law applicable to the issuing bank-confirming bank contract has to be determined by reference to Article 4 (2); Article 4 (1) (b), which covers contracts for the provision of services has no application to the situation.

11.74  Applying the rule laid down in Article 4 (2), the law of the country where the issuing bank is located governs its obligation to reimburse the confirmer once the latter has delivered the stipulated documents. It is, however, to be noted that this is a general rule, and can be displaced by application of Article 4 (3). To justify non-application of the rule,92 the vital question the sub-article requires one to answer is, is it clear from all the circumstances involving the relation of the issuing bank and the confirming bank that the contract is manifestly more closely (p. 328) connected with a country other than that in which the issuing bank is situated? If it is, the law of that other country applies; otherwise, the contract remains governed by the legal system indicated by application of Article 4 (2), i.e. the issuer’s law.

11.75  In this respect we must turn to the considerations intimated at the outset. It is unnecessary to repeat them, save that the contract is to be viewed as more closely connected with the country in which the confirming bank’s undertaking to the beneficiary or some other promisee93 under the credit is to be performed than with that of the issuing bank on two interrelated grounds: first, the issuing bank’s reimbursement engagement is essentially ancillary to and controlled by the law governing the confirming bank’s obligation; and second, both commitments are so treated as a matter of principle recommended by the convenience of the parties and business efficacy.

11.76  There is an important qualification to this conclusion: where the credit in the particular case contains a stipulation that the confirming bank is to be reimbursed by the issuing bank in some country different from that in which the confirming bank is to perform its payment obligation, the law of that country should apply. This qualification, in substance denied by dicta in a couple of cases94 without adequate consideration, will be discussed a little later in the next section.

E. Non-obligated Nominated Bank that has Purchased Documents in Its Own Right

11.77  A nominated negotiating bank that has purchased documents from the beneficiary and then seeks reimbursement from the issuing bank or confirmer is the third and final of the various categories of nominated banks we identified earlier.95 As mentioned earlier, a letter of credit inviting this bank96 to negotiate the beneficiary’s conforming documents and deliver the documents in accordance with the prescribed manner, entitles the bank to the sum named in the credit once it acts as requested. The law of the credit normally controls the question whether or not the negotiating bank has performed the requirements of the credit so as to give it the right to realize the facility, or whether there are special circumstances in the particular case warranting suspension (e.g. by injunction)97 of that right or invalidating the right altogether. We have seen that the credit is characteristically mute on the law. How the courts could or should puzzle it out in the specific context of an action for reimbursement brought by the negotiating bank under the credit is the subject of the ensuing inquiry.

(1)  Revised Article 5’s stance

11.78  Under Revised Article 5, the forum court in any jurisdiction in the United States would initially turn to the choice of law rule in section 5-116 (b) and then to the provision of section (p. 329) 5-103 (c). The judge is there directed to determine the negotiating bank’s right by reference to the law of the country in which the defendant issuer or confirmer is located. By reason of the subsection, the law which governs the claimant bank’s claim, as with a beneficiary’s, varies according to the defending party. If, for instance, a negotiation credit is opened in, say, China, confirmed in New York, and unrestricted for negotiation in Michigan (where the beneficiary is perhaps located or wishes to utilize the credit, e.g. to pay his suppliers), the instant claimant being a nominated negotiating bank in Michigan will have its claim resolved in accordance with the law of the place of the particular bank against which it chooses to issue proceedings. Of course, for reasons of convenience the negotiating bank will elect to wrestle with the confirming bank since they are both located in the United States and the application of New York law is unlikely to spring any surprises. But, in the event of supervening collapse of the confirmer (regrettably this has been happening relatively frequently across the US and other parts of the world) and slim prospects of obtaining reimbursement of the sum paid out to the Michigan beneficiary, the Chinese issuing bank will become the natural choice as defendant and the law of China rather than New York law will govern the claim.

11.79  At this juncture, it is suggested that it would be a serious mistake if the judge stopped there and simply proceeded to apply the Chinese law selected by section 5-116 (b). The proper course of action the court should take is indicated in section 5-103 (c) and involves ascertaining whether the parties have agreed, expressly or impliedly, not to subject themselves to the effect of applying section 5-116 (b). Much of the argument already put forward in the related context of the confirming bank is applicable here. And it is shortly this: the sort of commercial inconvenience and even absurd consequences which would follow from adopting the law of the issuing bank’s location, China, in preference to that of the place at which the credit is made available for negotiation (i.e. Michigan in the case instanced) afford strong grounds for believing that had the parties as just and reasonable business entities given thought to the matter, they would have opted for the latter law to regulate their reciprocal rights and liabilities.

11.80  Worth noting, however, is a substantial line of authorities98 which hold that if the negotiation credit at issue gives the negotiating bank the right to request reimbursement in a jurisdiction other than the country of availability of the credit, the law of that jurisdiction is to be applied. There can be no difficulty treating this approach as establishing an exception to the position just advanced. Surely, the policy basis of the exception is in consonance with that underlying what we have discussed in relation to the confirmer, namely, the need to give effect to the reasonable expectations of the parties, an essential objective of the section 5-116 (b) choice of law rule properly read with section 5-103 (c).

(2)  The law governing the purchase at common law and under Rome I Regulation

11.81  It is now necessary to examine whether and, if so, in what way the considerations involving the application of those sub-articles are comparably relevant to the position at common law and under the Rome I Regulation. With regard to the case law regime, the task to be addressed is, with what legal system does the contract the negotiating bank typically (p. 330) seeks to enforce under a credit have its closest and most real connection? The contract is of course the reimbursement undertaking spelt out in the credit, and the party sued may be an issuing bank or a confirming bank, depending on whether the facility is confirmed and, further, against whom the claimant negotiating bank chooses to enforce the credit. However, the credit being of the confirmed or unconfirmed variety has minor relevance for present purposes.

11.82  Essentially the same task is presented under the Rome I Regulation. A threshold issue is ordinarily to determine which article in the Regulation covers the reimbursement contract in dispute. Clearly, the contract does not fall under any of the sub-clauses in Article 4 (1) dealing with specific categories of contracts. In such a case, Article 4 (2) says that the law of the country where the party who is to carry out the characteristic performance of the contract resides governs the contract. Almost without exception, the characteristic performance of the contract is regarded in academic literature as the negotiation of presentation by the negotiating bank under the credit. This thinking has its roots in Mance J.’s dictum we saw noted in Bank of Baroda,99 largely echoed by Potter L.J. in the later case of Marconi,100 that the confirming bank’s honouring of documents characterizes the contract between it and the issuing bank. We have earlier demonstrated that their Lordships’ observations overlooked the pre-existing series of highly authoritative dicta in point. Had the court in Bank of Baroda had advantage of those pronouncements, there would have been little scope for the idea that agency represents the defining characteristic performance of the issuer-confirmer contractual relation. Well established decisions101 and the understanding of the contracts in banking practice see no such agency between the confirmer and the issuer except for the quite limited purpose of the former advising the beneficiary of the terms of the credit on behalf of the issuer.

11.83  Thus, what seems to be a widely held notion in a number of textbooks102 and commentaries103 appears mistaken. The preferable view today, a view validly derived from the special nature of the letter of credit device as an instrument of payment or financing business transactions, seems to be that the reimbursement undertaking in the credit characterizes the contract (p. 331) which the negotiating bank wishes the court to enforce, in the same way that the payment undertaking in a credit is the characteristic performance of the contract for which a beneficiary usually brings an action to enforce under a credit.

11.84  Bearing this in mind, the characteristic performer of the contract in any given litigation raised by the non-obligated nominated negotiating bank is the issuing bank or confirming bank another obligated nominated bank. Hence, so far as Article 4 (2) requires application of the law of the characteristic performer’s location, in an action brought on a confirmed credit the law applicable to the reimbursement claim is that of the issuer’s country or of the confirmer’s, depending on the performer that the claimant chooses to sue. Whichever characteristic performer becomes the defendant to the action, however, the ultimate question the judge has to tackle is substantially found in Article 4 (3): Is ‘it clear from all the circumstances of the case that the [reimbursement] contract is manifestly more closely connected with a country other than that indicated in [Article 4 (2)]’? If it is, then ‘the law of that other country’ applies.

11.85  To determine the legal system (at common law) or country (pursuant to Article 4 (3)) with which the reimbursement undertaking is most closely connected, there are three competing candidates, namely: (i) the law of the place where the negotiating bank is obligated by the terms of the credit to deliver complying documents for acceptance; (ii) the law of the place where the negotiating bank is to negotiate the documents to the beneficiary; and (iii) the law of the place where the negotiating bank is to be reimbursed. Which of these can reasonably be presumed to have been intended by the parties to govern the undertaking?

(a)  Is the applicable law that of the expected place of delivering documents to issuer?

11.86  Among the three possible legal systems or countries, the first is the least likely to succeed. But it enjoys the full endorsement of Ali Malek and David Quest.104 However, we noted previously that, as with the confirming bank and beneficiary, the doctrine of strict compliance requires the negotiating bank to deliver the documents stipulated in the credit in compliance with (if any) the prescribed manner in order to be entitled to reimbursement of the sum it advanced (i.e. negotiated) to the beneficiary. Admittedly, therefore, the place of delivery of the required documents is an important factor in triggering the operation of the credit.

11.87  But this element should attract no more a lightweight in determining whether the law there is applicable to the undertaking(s) in the credit to honour the negotiating bank’s presentation. The sort of problem which would result if it is accorded a decisive role is graphically illustrated by European Asian Bank v Punjab & Sind Bank.105

11.88  The facts of the case were these. The Singapore branch of European Asian Bank, EAB, requested reimbursement from a New Delhi issuing bank, Punjab Bank, under a negotiation credit set up at the instance of Jian and expressed to be available with any bank in Singapore and106 confirmed there by Allgemene Bank Nederland, ABN. The issuing bank refused to (p. 332) honour the claim, citing an Indian court’s prohibition of payment on the credit, following a lawsuit filed by Jian; ABN also denied liability, though it was a confirming bank with an independent obligation to effect reimbursement in accordance with the credit. The negotiating bank then launched litigation against the issuing bank in the English courts, claiming US$2,250,000, the amount of the credit, with interest. In support of its application for a stay of the proceedings on the ground that India was clearly more appropriate than England for the trial of the action,107 the issuing bank argued that its contractual obligation to the negotiating bank under the credit was governed by Indian law.

11.89  Robert Goff J. rejected this submission and held108 that the law applicable to the contract was that of Singapore. The Court of Appeal affirmed,109 with Ackner L.J. emphatically saying ‘I do not accept that the contract was governed by Indian law’.110 Although not explicitly stated in the judgments of either court, it is reasonably plain from the decisions that their Lordships attached much more significance to the law of the place at which negotiation of documents to the beneficiary was contemplated to take place in Singapore, as opposed to India, the place where the negotiating bank was obliged by the terms of the credit to tender the documents by airmail or courier.111

11.90  Again, although the reason why they elected the former and not the latter as the governing law is unexplained by any of the four judges, it is submitted that the most compelling factor is the issue as to the law most likely to safeguard the legitimate interests of the negotiating bank, secure the ends of justice, and reinforce the utility of letters of credit as a device for ensuring assured and prompt payment: Here is a non-obligated negotiating bank which has paid out a very large sum to the beneficiary of a credit, for comparatively modest discounting charges, on the faith of the promise in the credit that its right to reimbursement is guaranteed, so long as it acts bona fide in taking up and forwarding conforming documents under the credit. Now, if a reasonable negotiating banker, sufficiently committed to safe and sound banking practices, in the position of the claimant negotiating bank when effecting the payment to the beneficiary, is asked, ‘what law shall apply to your right of reimbursement?’, it is hard to imagine the banker selecting the law of the place of presentation of the documents to the issuing bank, urged by Messrs Ali Malek and David Quest.

11.91  Indeed, why would the negotiating bank choose to subject its right to a law which the issuing bank’s customer, the applicant for the credit, can readily deploy through one means or other to (as happened in the European Bank case) suspend or dissolve the reimbursement undertaking created by the credit when the sales or other contractual arrangements covered by the credit go awry?(p. 333)

(b)  Is the applicable law that of the place stipulated for negotiation of documents?

11.92  It would appear easy to presume that the negotiating bank and issuing bank mutually intended the local law of the place of negotiation of the beneficiary’s documents to govern its right of reimbursement. A just and reasonable issuing bank would not have serious misgivings about the effect of its promise being controlled by the law of that jurisdiction; and further, because it is highly improbable that a reasonable and diligent negotiating bank, upon advancing money against a set of apparently complying documents, would have any anxiety over what its own law may say on the validity and scope of its entitlement to reimbursement. At all events, if the issuing bank complains that the law of the place where the credit anticipated negotiation of complying documents to occur controls its undertaking to the non-obligated negotiating bank, then it should have expressly set forth in the text of the credit the law of its own country as the governing law. After all, it had the power to make the insertion at the point of opening the facility, but neglected to do so; and has to accept the legal result of the neglect.

11.93  It may be thought that the law of the place of negotiation we consider eminently suitable for the just requirements of the nominated negotiating bank and issuing bank could not possibly have application in cases where the terms of the letter of credit at issue apparently envisage negotiation of conforming documents in any country; in this event, the issuer’s law has to be taken as controlling, for presentation of documents for acceptance will almost certainly occur in the issuer’s country. Such view is by no means novel and was in fact the construction William Stone J. in the High Court of Hong Kong put on the credit in Rabobank v Bank of China.112

11.94  Rabobank involved an unconfirmed negotiation credit opened in China in favour of a Hong Kong-based exporter to finance the purchase of a quantity of Sarawak round logs. The credit was expressed as expiring in Hong Kong on 1 December 1999. The issuer’s defence to a Hong Kong branch of a Belgian negotiating bank claim for reimbursement was, in part, that the claim was governed by Chinese law; and as a result of a subsisting attachment order issued by a Chinese court, the issuing bank was excused from performing its obligation to the claimant negotiating bank under the credit. William Stone J. said that the law with which the credit has its closest and most real connection is the law of China and upheld the defence. In so ruling, he reasoned: ‘In this connection, it is difficult to see why the asserted place of negotiation, that is Hong Kong, upon which great reliance was placed by the plaintiff, should be accorded greater weight as a “connecting factor” than [China, the issuing bank’s location ] ... It is significant in my view that this credit was not confirmed in Hong Kong, and that under the terms of the credit there need not have been any negotiation in Hong Kong’, since the credit was merely expressed to be ‘available with any bank by negotiation’ (emphasis in original). Without doubt, the judge failed to read the letter of credit in a commercially reasonable manner. Had he done so, it would have been obvious to him that the credit required negotiation to take place only in Hong Kong; negotiation in China was not contemplated by the credit. Otherwise, why was Hong Kong the stipulated place of expiry of the credit?

11.95  While it is true that some credits, literally read, may quite readily lend themselves to treatment as contemplating that negotiation under them can be effected by any bank in any country, (p. 334) it must be remembered that the courts have since abandoned literalistic or hyper-technical modes of looking at the wording of commercial instruments. Letters of credit are typically drafted, not by lawyers or some other such professionals trained in legalese but by ordinary commercial persons and regular staff members of a bank. In place of literalism, they have generally embraced and repeatedly applied a business common sense approach in a great number of cases of the highest authority elaborated upon earlier.113

11.96  The result is that the standard of reference as to what, in practical terms, a given credit should be understood to have intended is that of the reasonable banker operating in the situation of the parties to the instrument. As a matter of business common sense, then, one would have no difficulty appreciating that a credit of the sort mentioned, albeit worded in a language connoting that the facility has contact with the four corners of the world, is primarily designed for the beneficiary’s use in his own country. Furthermore, it invites any bank there (as distinct from any bank operating anywhere else in the world) to advance the amount of the credit less the usual bank discounting charges and interest against the beneficiary’s complying presentation. This then is the footing on which the clause in the instanced credit is to be regarded in its commercial setting.

(c)  Cases regarding promise of reimbursement in a particular jurisdiction

11.97  Since the law of the place of negotiation presumptively governs the negotiating bank’s rights as found earlier, what about a credit in which reimbursement is promised not in the negotiating bank’s location, say, India, where negotiation is to take place, but in a major international financial centre, say, London? Would the reasonable banker consider the negotiating bank’s reimbursement claim to be more closely connected with England than India and accordingly governed by English law rather than Indian law, the law of the place of negotiation? If so, would it matter if the credit left the locus of reimbursement to the discretion of the negotiating bank, and the right is exercised at the time of its submission of the documents to the issuing bank?114

11.98  On the latter point, it is settled law that where a term in a contract expressly or by implication gives an option to a party as to the place of payment, once the option is exercised and communicated by him to the other party, this party’s payment obligation, in the absence of a contrary agreement, is to be performed at the selected place. The nominated place for the performance of the reimbursement obligation in the credit has the wider effect of giving the courts of that forum jurisdiction to hear the case in the context of Article 5(1) (a) of the Brussels I Regulation.115 In Royal Bank of Scotland plc v Cassa di Risparmio delle Provincie Lombard,116 Philips J. considered a provision in six letters of credit issued by Italian banks and confirmed in London by Royal Bank of Scotland (RBS). The clause reads, ‘Upon receipt (p. 335) of regular documents at your counters please accept beneficiary’s draft drawn on yours and at maturity you are authorised to reimburse yourself with Manufacturers Hanover Trust Co of New York’. He and the Court of Appeal affirmed117 that the clause created an obligation on the issuing bank to effect reimbursement in New York.118

11.99  Failure to discharge the reimbursement obligation at the designated place upon a valid demand is a breach of contract occurring within the named country119 and founds a right of action for the sum which ought to have been paid. It would thus seem wholly immaterial that the credit does not explicitly name the jurisdiction in which reimbursement has to be made. What matters is that the instrument, so far as can fairly be gathered from its terms and the surrounding circumstances, including the parties’ course of dealing (if any), calls for the reimbursement undertaking it incorporates to be performed in a given country. Turning to the principal issue in hand as to whether performance of the substantive undertaking may legitimately be presumed to be subject to the laws of that country and not those of the place of contemplated negotiation of documents, the short answer is yes. But this is rejected by a slender line of dicta in a trickle of English cases120 and also in a Hong Kong decision.121 In the courts’ view, a provision entitling the negotiating bank to claim reimbursement from a particular entity located in a particular financial centre of a country should not be taken into consideration when searching for the law most closely connected with the claim. The reason adduced has been that the provision is purely a matter of convenience, the credit having been denominated in the currency of the country in question.

11.100  This assumption, however, seems unfounded. In Bank of Credit & Commerce Hong Kong Ltd v Sonali Bank,122 for instance, of the thirty-five negotiation credits at the centre of the litigation, six were to be realized by the negotiating bank in London, twenty-eight in Hong Kong and one in New York. Notwithstanding the diversity of the locations for reimbursement, all the thirty-five credits were in one currency: US dollars. And it was in terms of this currency that the claimant negotiating bank raised its thirty-five claims. Additional examples of such credits denominated in currencies other than those of the country in which reimbursement is to be effected can be found in a number of decided cases too numerous to enumerate here.123(p. 336)

11.101  Thus, the fact of the matter is that a credit does not stipulate for reimbursement to be made in a named country merely because the currency of the credit belongs to that country. From a business point of view, the primary object of the stipulation is to induce a potential confirming bank or non-obligated negotiating bank to act on the credit. Without the clause, the banks are most likely to shun the credit for fear of having to seek in the issuing bank’s country reimbursement of any sum it may advance to the beneficiary and then become unduly exposed to the vagaries of the legal and political climate prevailing in that country, including, as we repeatedly saw in the cases discussed earlier, the shenanigans of the applicant, the issuing bank’s customer.

11.102  But when a credit carries the provision, the nominated bank’s fears are considerably dispelled. In this regard, a stipulation as to the financial centre at which reimbursement is promised can and should be treated as giving rise to the inference that the reasonable banker would expect the rights of the non-obligated negotiating bank and confirmer to be protected and governed by the law of the country which owns the centre. This view evidently has much to recommend it, and has in substance found favour with the courts in a number of jurisdictions in the United States.124 In J. Zeevi & Sons Ltd Grindlays Bank (Uganda) Ltd,125 a clause in a negotiation credit opened in Kampala for the benefit of a US party nominated New York as the place for reimbursement to the negotiating bank. The Court of Appeals said this about the effect of that clause: ‘The provision respecting reimbursement in New York was an integral part of that for which the parties bargained ... The value to those in commerce of having a place at a financial capital where funds can be obtained on a simple letter of credit, away from a relatively small bank in an underdeveloped country of uncertain political stability, is obvious’.126 It concluded that the reimbursement provision is quite essential, economically, to the total arrangement and operation of the credit, since a nominated bank would be unwilling to purchase a beneficiary’s documents and wait a relatively inordinate time for reimbursement to come from a remote source.

11.103  It is time the English and Hong Kong courts reviewed the stance adopted in the Sonali and Rabobank line of cases and followed the lead taken in the New York decisions we have explored and considered to be consonant with the delicate requirements of letters of credit transactions.

F. Lex situs of a Debt Arising Out of the Letter of Credit

11.104  Although the question whether the contractual obligation of the issuing bank to honour a nominated bank’s claim for reimbursement (or beneficiary’s claim for payment) is discharged, extinguished, modified, or suspended, is governed by the law applicable to the obligation, only the law of the country in which the claim is situated can alter the nominated bank’s proprietary right to it by way of, for example, attachment or garnishee orders,127 legislative (p. 337) acts, administrative instruments, or an executive decree.128 Thus, an order of a court in the country of the applicable law purporting to attach the proceeds of the credit is ineffective insofar as the situs of the right to the sum is in another jurisdiction.

11.105  For the right to the money payable to be considered situated in a given country, the general rule is that the person said to owe the money, the debtor, must be resident there.129 The requirement of residence, Warrington L.J. notably affirmed in 1921, has ‘been well settled for a long time’.130 If the debtor has an obligation to pay the debt in a named country, then the debt is located in that country, provided he ‘keeps house and does business’131 in the country. Furthermore, if the debtor such as a corporation is resident in different countries, the particular residence at which the terms of the contract creating the debt stipulates that it is payable is treated as the situs of the debt;132 in the absence of an express selection by the parties, the debt is deemed to be located in any of the several residences at which it would be paid in the ordinary course of business.133

11.106  However, the course of legal thinking on the applicability of the foregoing general rule to the sums on letters of credit has been marked by the majority’s dictum in the Court of Appeal decision in Power Curber International Ltd v National Bank of Kuwait SAK134 that a debt under a credit is different from simple contract debts because their situs is to be ascertained by looking at the country in which they are payable against documents;135 the debtor’s residence is wholly irrelevant in the determination. This notion has received a tremendous fillip in the successive editions of Dicey and Morris on the Conflict of Laws starting from the 11th,136 where it is enunciated that the exception to the general rule is laid down by the court for compelling policy reasons, namely, to enhance assurance of payment to the seller under letters of credit without the exception that the debt would often be situated in the issuing bank’s country, the courts of which, as we have seen earlier in a number of decided cases, (p. 338) habitually obstruct payment by attachment or garnishee orders or other means on the basis of a mere allegation of fraud or dishonesty related to matters underlying the credit; whereas by reason of the exception it is more likely to be situated in the seller’s locality and, accordingly, enjoy greater security.

11.107  Undeniably, these considerations underlie the creation of the exception. A couple of issues, however, deserve close attention: first, is there any such thing as a debt being due against documents under a credit? Second, does the exception apply to the issuing bank’s debt owing or accruing due to the nominated bank? If so, how is the situs of the debt to be determined?

11.108  Taking the points one after another, the idea that a debt arising out of a credit is distinct from an ordinary contract debt because it is due against documents is surely a misconception. We noted earlier that one of the most fundamental canons controlling letter of credit operations all over the world is the doctrine of strict compliance which requires a nominated bank (and a beneficiary) to make a complying presentation to the issuing bank in order to become entitled to the proceeds of the credit. Prior to the time when an issuing bank accepts or is understood by the UCP incorporated into the credit as interpreted by the law governing its obligation to have accepted the documents remitted to it, there is nothing in the credit which can properly be regarded as a debt due, or accruing due, from the issuing bank to the presenting nominated bank (or beneficiary).

11.109  Clearly, the dictum ‘a debt under a credit is situated in the place where it is in fact payable against documents’ in Power Curber must have been a throwaway observation, for to make the issuing bank and confirming bank debtors before their acceptance of a presentation, would be to radically transform their obligations and the rights of the presenting nominated bank or beneficiary and, consequently, to destroy the letters of credit. The nominated bank’s (or beneficiary’s) interest in a credit, constituted by its mere entitlement to present documents to the issuing bank, will immediately become an attachable debt at the suit of its creditor for the purposes of this party’s application for a garnishing order or third party debt order pursuant to, respectively, Order 45137 and Part 72 of the Civil Procedure Rules 1998.138 By the same token, the issuing bank and confirming bank, which are traditionally not indebted on the credit except when the promisee nominated bank or beneficiary performs the requirements of the facility by tendering complying documents, may, without the requisite performance having occurred, nevertheless be called upon to pay the amount in question to the nominated bank’s or beneficiary’s judgment creditor.

11.110  It should be easy to appreciate therefore that an issuing bank’s debt139 under a credit normally comes into existence only at the time it advises its acceptance of documents to the presenting (p. 339) nominated bank (or beneficiary). Regarding the question as to the situs of that debt, it is suggested that it is situated where the beneficiary receives the notification of the advice, i.e. his country, on the basis of the special considerations outlined above. Now, since the issuing bank’s debt is typically owed to a nominated bank through the same process as it is owed to the beneficiary, there seems to be no obstacle to the applicability of the proposition just advanced to this context, so the locality of the debt is where the nominated bank is notified of the issuing bank’s acceptance of the presentation, which will almost invariably be its location.

11.111  But what about a bank who has, under a discounting arrangement or forfaiting transaction with a beneficiary, purchased an accepted draft or a deferred payment obligation incurred by an issuing bank against a complying tender of documents? Where is the locality of the proprietary right to the proceeds of the draft or the amount of the credit? Is this situation governed by the general rule or by the exception?

11.112  It is generally accepted in practice that such a discounting bank or forfaiter mentioned is as much a facilitator of the letter of credit machinery, fluidity, and utility as the nominated bank itself. In essence, then, there seems to be no reason to subject the matter to the general rule which would doubtless lead to the lex situs of the debt being the law of the issuing bank’s location, thereby rendering it less protected than its practical counterpart. Accordingly, one has to ascertain the law of some other country.

11.113  Considering that the acceptance of the draft or the incurrence of the deferred payment obligation was not originally communicated to the discounter or forfaiter as a nominated participant in the letter of credit transaction, it is suggested that the issuing bank’s indebtedness to him could conveniently be treated as situated in the country in which the acceptance contract is made or the deferred payment undertaking incurred. As to identification of the country, the answer, albeit analogously supplied by section 21 of the Bills of Exchange Act 1882, should be the place at which the acceptance contract or obligation is created,140 namely, where the beneficiary originally received the issuing bank’s communication of its acceptance of the bill or the documents presented to it under the credit. Consequently, the law of the beneficiary’s locality would be the lex situs of the issuing bank’s indebtedness to the forfaiter.

G. Conclusion

11.114  There are major shortcomings in the various approaches to the problem of ascertaining the law applicable to the issuing bank’s reimbursement undertaking to the nominated bank in the Anglo-American jurisdictions covered in this work. At present, the section 5-116 (p. 340) (b) choice of law rule in the Uniform Commercial Code Revised Article 5 requires that in default of a provision for the law of the credit creating the obligation, the law of the issuing bank’s location is to be applied. The rule, albeit wholly innocuous with regard to domestic letters of credit, has nothing to recommend it in the context of credits opened in jurisdictions outside the United States. As shown by many of the cases explored, the issuer’s law often operates to defeat the nominated bank’s access to the fruits of a credit in a great variety of circumstances involving little or no evidence that it acted fraudulently in the performance of the terms of its nomination and in honouring an apparently conforming tender of documents. Because no comparable disadvantage is suffered if the law applied is that of the country in which negotiation is to occur, the effect of application of the subsection, insofar as it sustains that disadvantage, is to be taken as varied accordingly, having regard to section 5-103 (c) of the Code.

11.115  On the other hand, dicta in a line of Hong Kong and English cases holding that a clause in a credit, as to the place at which reimbursement is to be made, is not a material factor in considering the law applicable to the issuing bank’s undertaking to a nominated bank are, it is argued, patently erroneous in that they fail to recognize the commercial purpose of the provision, namely, to assure the nominated bank of the level of risks involved in getting paid on the credit. Thus, when a Chinese letter of credit stipulates, expressly or impliedly, that the Chinese issuer shall reimburse a Thai nominated bank in London, it is not the same as when it is promised in China or Thailand. It is now nearly thirty-five years since the New York court recognized this distinction and affirmed that under such a credit London and therefore English law should be viewed as being most closely connected with the issuer’s reimbursement obligation. It is fervently hoped that if the occasion presents itself today, the English court will follow the lead of New York and abandon the mindset of existing dicta. This will in turn enhance the nominated bank’s confidence in the utility of letters of credit as a veritable means of oiling the wheels of international commerce.


1  Ch 1, section C.

2  The terms ‘negotiate’ and ‘purchase’ are interchangeable expressions: for a definition of negotiation, see Art 2, UCP 600, replacing Art 10 (b) (ii) of the UCP 500.

3  This is usually charged to the beneficiary’s account in that it will be deducted from the face amount of the credit.

4  This is expressly laid down in Art 7 (c), UCP 600.

5  The maturity date varies from credit to credit, depending on the terms of the credit in question. In some, the days are to be calculated from the date of the bill of lading; in others, the date is when the documents are received by the issuing bank from the nominated bank. In still other cases, especially where the credit is opened available with the issuing bank by deferred payment or acceptance of a time draft, with the nominated bank being authorized to negotiate a complying presentation under the credit, the relevant 360 days are calculated from the day when the issuing bank incurs its deferred payment undertaking or accepted the draft accompanying the presentation. The same applies mutatis mutandis if it is the nominated bank that incurs the deferred payment undertaking or accepts the draft as drawee under the credit.

6  Art 7 (c), UCP 600.

7  I.e. as provided by the credit-opening agreement, to which both he and the issuing bank are parties.

8  cf. Art 9, UCP 600 which directs that if a bank is requested to advise a credit or amendment but does not wish to do so, it must so inform, without delay, the bank from which the credit or amendment has been received. No sanction is indicated for a bank that fails to comply with this provision. But the bank may be liable in tort in the event that its failure to act causes the issuing bank financial loss: see generally Ch 2.

9  Although viewed as agent, it deserves noting that it does not act in a fiduciary capacity as would be found to exist in a traditional contract of agency: see Map Marine Ltd v China Construction Bank Corp, 2009 WL 6019497 (NY Sup); Sound of Market Inc v Continental Bank International, 819 F 2d 384, 388 (3d Cir 1987).

10  If the terms of the credit are erroneously advised, the issuing bank is bound by them, but the advising bank would be liable for the error: discussed in Ch 2. Art 9 (c), UCP 600; Uniform Commercial Code Revised Article 5—Letters of Credit, §5–106 (a) and (b) (hereinafter Revised Article 5).

11  Southern Ocean Shipbuilding Co Pte Ltd v Deutsche Bank AG [1993] SGHC 221, [1993] 3 SLR 686, [40] (HC, Singapore).

12  For an English authority on the point, see Chatenay v Brazilian Submarine Telegraph Co Ltd [1891] 1 QB 79, 82–83, Lord Esher M.R.

13  The Restatement (Second) of the Conflict of Laws, 1971.

14  256 AD 2d 11 (1998).

15  Comprising Milonas, J.P., Ellerin, Rubin, and Mazarelli, JJ.

16  2005 WL 5959993 (NY Sup), judgment delivered in the Supreme Court, New York County, on 13 September 2005.

17  2005 WL 5959993 (NY Sup) (emphasis added).

18  Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I), published in the Official Journal of the European Union, OJ 2008 L 177/6, ‘Rome I Regulation’. As noted in the introductory section to Part III, the instrument supersedes the EC Convention of the Law Applicable to Contractual Obligations 1980 (the Rome Convention) and applies in all the Member States of the EU to contracts made after 17 December 2009.

19  Dicey and Morris on the Conflict of Laws, 11th edn (London: Stevens & Sons, 1987), Rule 200.

20  Dicey and Morris on the Conflict of Laws, 11th edn (London: Stevens & Sons, 1987), esp the case law authorities cited to Rule 200.

21  This is to be contrasted with a confirming bank or a non-obligated negotiating bank which, in honouring such a presentation of documents, acts mainly in pursuit of its own business. The point is discussed more fully in the appropriate contexts later.

22  I.e. Art 4 (1) (b).

23  In the context of transferable credits, a special set of terminologies usually obtains: the letter of credit expressly denominated as transferable is the ‘original credit’ or ‘prime credit’; the beneficiary thereunder is termed the ‘first beneficiary’; a nominated bank that effects a transfer of the credit is the ‘transferring bank’, and may be advising paying bank; the party or parties to which the original credit is transferred is the ‘second beneficiary’; and a credit made available to the second beneficiary is regarded as a ‘transferred credit’. See Ch 1, section C (8).

24  Art 38 (j), UCP 600 expressly entitles the first beneficiary to indicate in his request for transfer ‘that honour or negotiation is to be effected to a second beneficiary at the place to which the credit [is] transferred’.

25  2005 WL 6229841 (NY Sup) (judgment delivered 20 October 2005), rev’d, 34 AD 3d 124 (2006), 820 NYS 2d 588 (2006).

26  2005 WL 6229841, at *6.

27  The interest was quite substantial, having been ordered to be calculated from about 6 September when the claimant confirming bank’s presentation ought to have been honoured to 19 September 2006, and from that day until the judgment was satisfied.

28  Vita Food Products Incorporated v Unus Shipping Co Ltd [1939] AC 277, 291, Lord Wright (PC); R v International Trustee for the Protection of Bondholders [1937] AC 501, 531.

29  These include the public policy of the forum, a mandatory provision of the lex fori or of the law the country of otherwise applicable law or of the place where the obligation arising out of the credit has to be or has been performed: see generally Vita Food Products Incorporated v Unus Shipping Co Ltd [1939] AC 277, 291; Arts 3 (3), 9, and 21 of the Rome I Regulation.

30  The location of the issuing bank is its address indicated in the credit: section 5-116 (b), Revised Article 5.

31  As to the substance of the words in italics, see Official Comment 2, section 5-116 (b) of Revised Article 5.

32  1962 version, which did not include choice of law provisions.

33  The report is reproduced in (1990) 45 Bus Lawyer 1555 (hereinafter Report). See also James G Barnes and James E Byrne, ‘Revision of UCC Article 5’ (1994-95) 50 Bus Lawyer 1449.

34  Report, ibid, 1641–1643.

35  Uniform Commercial Code Article 4 deals with bank deposits and collections. By section 4-102 (2) (b), the ‘liability of a bank for action or inaction with respect to an item handled by it for purposes of presentment, payment or collection is governed by the law of the place where the bank is located’. Although ‘item’ is defined under section 4-104 (a) as ‘an instrument or a promise or order to pay money handled by a bank for collection of payment’, the word ‘item’ is regarded more broadly to mean ‘documents’ in Art 2 (b) of the Uniform Rules for Collections, 1995 Revision, ICC Publication No. 522: by Art 2 (a), collection means the handling by banks of documents in order to obtain payment from the payor or acceptance from a drawee; hence it may involve a collecting bank’s delivery of documents (items) against payment (D/P) or against acceptance (D/A). A ‘document’ is either a ‘financial document’ such as a bill of exchange or other similar instrument used for obtaining the payment of money; or a ‘commercial document’, including an invoice, insurance certificate, and transport documents (e.g. bills of lading and airway bills).

36  Report, 1642.

37  Report, 1643.

38  Report, 1643.

39  The Committee was appointed by the American Law Institute (ALI) and the National Conference of Commissioners on Uniform State Laws (NCCUSL), both of which subsequently approved Revised Article 5 in autumn 1995.

40  These are letters of credit issued in, and to be utilized by, the beneficiary in the United States.

41  The differences do not call for lengthy elaboration here: they are sufficiently detailed in such classics in the field as AG Guest (with specialist editors), Benjamin’s Sale of Goods, 7th edn (London: Sweet & Maxwell, 2006), Ch 22; John F Dolan, The Law of Letters of Credit: Commercial and Standby Credits, 4th edn (Austin, Tx: AS Pratt, 2007). See also the website of SITPRO Limited, now defunct. (Note that the body, Simpler Trade Procedures, set up in 1970 as the UK’s trade facilitating agency, closed down its office in September 2010 as a consequence of substantial cuts in government funding for certain programmes run by the Department of Business, Innovation and Skill, a government body which had been financing its operations). Remitting bank is referred to as ‘depository bank’ in section 4-105, Uniform Commercial Code Article 4.

42  The Task Force Report regarded the bank as analogous to the issuing bank.

43  The Task Force Report regarded the party as analogous to the confirming bank.

44  See section 4-203, Uniform Commercial Code Article 4.

45  Leading authorities include Calico Printers Association v Barclays Bank Ltd (1931) 36 Com Cas 71; New Zealand and Australia Land Co v Watson (1881) 7 QBD 374; Mackersy v Ramsays, Bonar & Co (1843) 9 C & F 818; Henry Prince v Oriental Bank Corp (1878) 3 App Cas 325.

46  This derives from the general rule that there is no privity of contract between principal and sub-agent: see AG Guest (with specialist editors), Benjamin’s Sale of Goods, 7th edn (London: Sweet & Maxwell, 2006), para 22-092. However, in Bastone & Firminger Ltd v Nasima Enterprises (Nigeria) Ltd [1996] CLC 1902, 1908, Rix J. suggested, obiter, that the Uniform Rules for Collections, 1978 edition, ICC Publication No. 322, appeared to have affected the orthodox common law position regarding absence of privity of contract between a collecting bank as sub-agent and seller as principal, since under Art 3 of the Rules both of those persons, as well as the remitting bank and drawee, are described as ‘parties to a collection’. Rix J.’s view is hard to support because, although by Art 3 the principal (seller) is liable to indemnify the banks against all obligations and responsibilities imposed by foreign laws or usages, Art 23 makes it clear that the collecting bank is only entitled to look to the remitting bank for reimbursement, not directly to the principal. If any doubt remains, it is at least now authoritatively settled that URC 522 of 1995, which succeeded the 1978 version does not create privity of contract between the principal (seller) and his sub-agent, the collecting bank: see Grosvenor Casinos Ltd v National Bank of Abu Dhabi [2008] EWHC 511 (Comm.), [2008] 2 Lloyd’s Rep 1, para 157, Flaux J.

47  That a confirmer, when performing its obligations as such, is not an agent of the issuer is discussed more fully later in this section.

48  The cases were only inconsistent with each other with regard to the law governing the issuing bank’s obligations to the beneficiary or a nominated negotiating bank under an unconfirmed credit: for a discussion of the relevant American decisions, see Ch 10.

49  For cases affirming that the law of the confirming bank’s location governs its right to reimbursement from the issuing bank, see Bank of Cochin Ltd v Manufacturers Hanover Trust Co, 612 F Supp 1533, 1542 (DCNY 1985), aff’d, 808 F 2d 209 (2d Cir 1986); Chuidian v Philippine National Bank, 976 F 2d 561 (9th Cir 1992), aff’g 734 F Supp 415 (CD Cal 1990); World Point Trading Pte Ltd v Credito Italiano, 22 AD 2d 153 (1996). Regarding the latter suggestion made in the text, see Canadian Imperial Bank of Commerce v Pamukbank TAS, 166 Misc 2d 647 (1994), a case in which the credit was issued by a Thai bank, confirmed by a Canadian bank, and payment made by it in Canada to the beneficiary, a Canadian exporter. Since reimbursement by the Thai issuing bank was to be effected in New York, and not Canada, Gammerman J. in the New York County court held that New York governed the Canadian confirming bank’s rights under the credit.

50  Marconi Communications International Ltd v PT Pan Indonesia Bank Ltd [2005] EWCA Civ 422, [2007] 2 Lloyd’s Rep 72, paras 64–67; Habib Bank Ltd v Central Bank of Sudan [2006] EWHC 1767 (Comm), [2006] 2 Lloyd’s Rep 412, paras 43–44 (Field J.); Bank of Credit & Commerce Hong Kong Ltd v Sonali Bank [1995] 1 Lloyd’s Rep 227, 237 (Cresswell J.); Bank of Baroda v Vysya Bank Ltd [1994] 2 Lloyd’s Rep 87, 92–93 (Mance J.); Union Bank of Switzerland v Indian Bank [1993] 3 SLR 371, 387; Mizuho Corporate Bank Ltd v Cho Hung Bank [2004] SGHC 159, [2004] 4 SLR 67; Crédit Industriel et Commercial v China Merchants Bank [2002] EWHC 973 (Comm), [2002] 2 All ER (Comm) 427, [44].

51  THD Struycken, Some Dutch Reflections on the Rome Convention, Art 4 (5), [1996] LMCLQ 18.

52  Jonathan Hill, ‘Choice of Law in Contract under the Rome Convention: The Approach of the UK Courts’ (2004) 53 ICLQ 325, 341.

53  i.e., Art 4 of the Rome Convention; replaced, without affecting the point under discussion, by Art 4 (2) and (3) of Rome I Regulation.

54  Offshore International SA v Banco Central SA [1976] 3 All ER 749, 752, per Ackner J.

55  Bank of Baroda v Vysya Bank Ltd [1994] 2 Lloyd’s Rep 87, 93 (col 1).

56  See, e.g., Nicholas Creed, ‘The Governing Law of Letter of Credit Transactions’ [2001] Journal of International Banking Law 41, 43, proposing that the courts’ preference ‘leaves the issuing bank open to exactly the same dilemma: it may have an obligation to reimburse the confirming bank under the laws of the confirming bank, but no corresponding right to indemnification by its customer, the contract with whom may be subject to a blocking order of the laws of the issuing bank’.

57  Brian Davenport and Michael Smith, ‘The Governing Law of Letters of Credit Transactions’ (1994) 9 Butterworths Journal of International Banking & Finance Law 3, 5.

58  Noted in the introductory chapter to Part III.

59  The objective reasonable business person test has been consistently affirmed by the courts as the prevailing approach in determining the legal system or country with which a contract is most closely connected: see Pacific Recreation Pte Ltd v SY Technology Inc [2008] SGCA 1, [2008] 2 SLR 491; Las Vegas Hilton Corporation v Khoo Teng Hock Sunny [1996] SGHC 152, [1997] 1 SLR 341, para 44 [High Court, Singapore], citing with approval The Assunzione [1954] P 150, 179 and Lord Wright giving the Privy Council advice in Mount Albert Borough Council v Australasian Temperance and Mutual Life Assurance Society Ltd [1938] AC 224. See also The Njegos [1936] P 90; The Adriatic [1931] P 241; Dicey and Morris on the Conflict of Laws, 11th edn (London: Stevens & Sons, 1987), 1192.

60  Ch 10.

61  The time of the contract is most probably when the confirming bank added its confirmation to the credit, as is the case with the issuing bank and beneficiary contract, which is created once the credit reaches the hands of the beneficiary. See generally Art 7 (b), UCP 600, briefly discussed earlier in Ch 2, section D.

62  As it occurred in the American case of Optopics Laboratories Corp v Savannah Bank of Nigeria Ltd, 816 F Supp 898 (SDNY 1993).

63  Mizuho Corporate Bank Ltd v Cho Hung Bank [2004] SGHC 159, [2004] 4 SLR 67 (High Court, Singapore), para 7 (Tan Lee Meng J.): ‘Under English and Singapore law the governing law of [the] contract between an issuing bank and a confirming bank is, without more, that of the place where the confirming bank carries on its business’. As support for this rule, the judge cited the cases of European Asian Bank AG v Punjab & Sind Bank Ltd [1981] 2 Lloyd’s Rep 651 (CA, Eng) and Kredietbank NV v Sinotani Pacific Pte Ltd [1999] 3 SLR 288 (High Court, Singapore).

64  Marconi Communications International Ltd v PT Pan Indonesia Bank Ltd [2007] 2 Lloyd’s Rep 72, para 67.

65  It is to be noted that an issuing bank’s obligation under a credit-opening agreement aimed at establishing a confirmed credit for the benefit of a designated party is to use its best endeavour to achieve that purpose. It is difficult to see how the issuing bank can claim to have discharged its best endeavour obligation when the failure to procure the confirmation of the credit was brought about by reason only that the issuing bank was unwilling to allow its relations with the potential confirming bank to be subject to the law proposed by the latter.

66  For discussion of the legal nature of a counter-guarantee, see generally Roy Goode, Guide to the ICC Uniform Rules for Demand Guarantees, ICC Publication No. 510 (1992). For a definition of a counter-guarantee, see Art 2 (c), Uniform Rules for Demand Guarantees (ICC Publication No. 758 of 2010), reproducing the corresponding provision in the earlier ICC Publication No. 458, 1992.

67  [1993] 1 Lloyd’s Rep 132.

68  [1994] 2 Lloyd’s Rep 411.

69  Today, the same conclusion would be reached under Art 3 (1), Rome I Regulation, which enables a court to regard as the applicable law of a contract the law ‘clearly demonstrated by the terms of the contract of the circumstances of the case’.

70  [1994] 2 Lloyd’s Rep 411, 418–419.

71  Wahda Bank v Arab Bank Plc [1996] 1 Lloyd’s Rep 470.

72  Wahda Bank v Arab Bank Plc [1996] 1 Lloyd’s Rep 470, 473, col 1.

73  Wahda Bank v Arab Bank Plc [1996] 1 Lloyd’s Rep 470, 473–474.

74  Wahda Bank v Arab Bank Plc [1996] 1 Lloyd’s Rep 470, 474; Bank of Baroda v Vysya Bank Ltd [1994] 2 Lloyd’s Rep 87, 94 (col 1).

75  Minories Finance Ltd v Afribank Nigeria Ltd [1995] 1 Lloyd’s Rep 134, 141 (Longmore J.): ‘It is usually the case that ancillary contracts are treated as having their closest and most real connection with the system of law of the contract to which they are ancillary ... examples [include] bills of lading issued under charter-parties and guarantees to secure obligations’.

76  [1994] 2 Lloyd’s Rep 87.

77  It provides: ‘When an issuing bank authorizes or requests another bank to confirm its irrevocable credit and the latter has added its confirmation, such confirmation constitutes a definite undertaking of such bank (the confirming bank), in addition to that of the issuing bank, provided that the stipulated documents are presented and that the terms and conditions of the credit are complied with’.

78  It provides: ‘By nominating a bank other than itself, or by allowing for negotiation by any bank, or by authorizing or requesting a bank to add its confirmation, the issuing bank authorizes such a bank to pay, accept or negotiate, as the case may be, against documents which appear on their face to be in accordance with the terms and conditions of the credit, and undertakes to reimburse such bank in accordance with the provisions of these articles’.

79  The credit in dispute was made subject to this edition of the UCP.

80  Bank of Baroda v Vysya Bank Ltd [1994] 2 Lloyd’s Rep 87, 90–91.

81  I.e. Arts 10 (b) and 11 (d), UCP 400, both of which are in substance equivalent to Art 7 (c), UCP 600, 2007 edition, which came into effect on 1 July 2007.

82  The error has in fact already caused confusion in the literature on the subject, as to which see notes 102 and 103, and accompanying text.

83  In substance, that by advising a credit or amendment, the advising bank signifies that it has satisfied itself as to the apparent authenticity of the credit or amendment and that its advice accurately reflects the information it received from the issuing bank.

84  [1983] 1 WLR 642.

85  [1983] 1 WLR 642, 656 (col 1). A similar view had been expressed several years earlier in Maran Road v Austin Taylor [1975] 1 Lloyd’s Rep. 156, 161, per Ackner J.

86  [2000] 1 Lloyd’s Rep. 275.

87  [2000] 1 Lloyd’s Rep. 275, 280 (emphasis in original). However, the judge acknowledged for certain purposes the confirming bank may act for the issuing bank. This view was clearly put in perspective by the Singapore Court of Appeal in Credit Agricole Indosuez v Banque Nationale de Paris [2001] 2 SLR 1, 14, in stating that the confirming bank is an agent of an issuing bank for the ‘only’ purpose of confirming the credit and, one may add, transmitting the credit to the designated beneficiary; Chinsim Trading Pte Ltd v Indian Bank [1993] SGHC 22, [1993] SLR 144 at para 40: ‘It is settled law that a negotiating bank does not negotiate as an agent of an issuing bank’.

88  [2001] 2 SLR 1. See also Chinsim Trading Pte Ltd v Indian Bank [1993] SGHC 22, [1993] SLR 144 at para 40: ‘It is settled law that a negotiating bank does not negotiate as an agent of an issuing bank’.

89  Credit Agricole Indosuez v Banque Nationale de Paris [2001] 2 SLR 1, 14. See also Southern Ocean Shipbuilding Co Pte Ltd v Deutsche Bank AG [1993] SGHC 221, [1993] 3 SLR 686, paras 27–29.

90  Credit Agricole Indosuez v Banque Nationale de Paris [2001] 2 SLR 1, 13.

91  See e.g. Article 9, 1933 Revision (ICC Brochure No. 82); Article 5, 1951 Revision (Brochure 151); Articles 10 (d) and 14 (a), 1993 Revision (Publication No. 500); Arts 2 and 7 (c), 2007 Revision (ICC Publication No. 600).

92  In the particular context of the Rome Convention see Intercontainer Interfrigo SC (ICF) v Balkenende Oosthuizen BV (C-133/08) European Court of Justice) [2010] QB 411, esp paras 33–37 and 64, The circumstances in which the general rule articulated in Article 4 (2) of the Convention may be disregarded pursuant to Article 4 (5) were the subject of a substantial body of case law and academic literature, including Samcrete Egypt Engineers and Contractors Sae v Land Rover Exports Ltd [2001] EWCA Civ 2019, [2002] CLC 533, para 41, where Potter L.J. in giving the judgment of the Court of Appeal explained that ‘To date, the high point of the jurisprudence justifying the decisive application of the presumption in all but the most exceptional of cases is Société Nouvelle des Papetieries de l’A v Machinefabriek BOA (1992) Nederlandse Jurisprudentie No. 750] in which the court stated: “it follows both from the wording and structure of Art 4 ... that the exception in Article 4 (5) (now in substance Article 4 (3) of Rome I Regulation) has to be applied restrictively, to the effect that the main rule [i.e. Article 4 (2), now Article 4 (2) of Rome I Regulation] should be disregarded only if, in the special circumstances of the case, the place of business of the party who is to effect the characteristic performance has no real significance as a connecting factor”’. See also Iran Continental Shelf Oil Co v IRI International Corp [2002] EWCA Civ 1024, [2004] 2 CLC 696, paras 77–82, per Clarke L.J.; Paul Lagarde, ‘The European Convention on the Law Applicable to Contractual Obligations: An Apologia’, (1981-1982) 22 Virginia Journal of Int’l Law 91, 97–98. For an illuminating discussion of the Dutch court decision in Société Nouvelle, see THD Strucyken [1996] LMCLQ 18. cf. the approach taken by Hobhouse L.J. with the concurrence of Mummery and Evans L.JJ. in Credit Lyonnais v New Hampshire Insurance Co Ltd [1997] CLC 909, 914, [1997] 2 Lloyd’s Rep 1, 5 (pointing out that the presumptions in Art 4 (2)–(4) were ‘very weak’).

93  It will be recalled that the other promisee is the non-obligated nominated bank.

94  As to these, see subsection (3) of this chapter.

95  See the introductory section to Part III. The other two are the advising paying bank and confirming bank.

96  The bank is normally in the locality of the beneficiary.

97  Shanghai Electric Group Co Ltd v PT Merak Energy Indonesia [2010] SGHC 2, [2010] 2 SLR 329, holding that whether an applicant is entitled to the grant of an injunction restraining payment or a call for payment on an on-demand bond or not, is to be determined by reference to the law governing the bond. This decision applies mutatis mutandis to the situation mentioned in the text, since on-demand bonds are recognized by the courts to be analogous with letters of credit.

98  Hanil Bank v PT Bank Negara Indonesia (Persero), 1997 WL 411465 (SDNY); Banco de Vizcaya SA v First National Bank of Chicago, 514 F Supp 1280 (ND Ill 1981). Reference may also be made to Fleet National Bank NA v Liang Argentina SA, 4 Misc 3d 1025, 798 NYS 2d 344 (SDNY 2004).

99  Bank of Baroda v Vysya Bank Ltd [1994] 2 Lloyd’s Rep 87, 93 (col 2), rejecting the counsel’s submission that the performance which is characteristic of the contract between Vysya Bank (confirmer) and Bank of Baroda (issuing bank) is the latter’s obligation to reimburse the former.

100  Marconi Communications International Ltd v PT Pan Indonesia Bank Ltd [2007] 2 Lloyd’s Rep 72, para 85: ‘[T]he right of the confirming bank to reimbursement by the issuing bank is merely consequential upon the payment made by the confirming bank under its contract with the beneficiary’. Similarly, Mance J.’s statement in Bank of Baroda runs: ‘The liability on the part of the issuing bank to reimburse or indemnify the confirming bank is consequential on the character of the contract [between the confirmer and issuer]; it does not itself characterize the contract’. As already argued, these dicta are founded upon the fallacious premise that a confirmer, in honouring a presentation, acts as agent of the issuer. However, their Lordships’ view would apply to an advising bank making a payment to the beneficiary on behalf of the issuer, because in this case the advising bank’s decision as to the conformity of the documents is binding on its principal, the issuer vis-à-vis the beneficiary: see South Ocean Shipbuilding Co Pte Ltd v Deutsche Bank AG [1993] SGHC 221, [1993] 3 SLR 686, para 40, per Punch Coomaraswamy J.

101  See generally Ch 10, section B.

102  See e.g., Peter Ellinger and Dora Neo, The Law and Practice of Documentary Letters of Credit (London: Hart Publishing, 2010), 380; Lawrence Collins (with specialist editors), Dicey, Morris and Collins on the Conflict of Laws, 14th edn (London: Sweet & Maxwell, 2006), para 33-311; JJ Fawcett and JM Carruthers (eds), Cheshire, North & Fawcett’s Private International Law, 14th edn (London: Sweet & Maxwell, 2008), 713.

103  CGJ Morse, ‘Letters of Credit and the Rome Convention’ [1994] LMCLQ 560, 565, referring to Mance J.’s dictum, said: ‘This conclusion would appear to be correct, at least in the general sense that the characteristic performer is that of the confirming bank’.

104  Ali Malek and David Quest (eds), Jack: Documentary Credits, 4th edn (Haywards Heath, West Sussex, England: Tottel Publishing, 2009), paras 13.69–13.71.

105  [1981] 2 Lloyd’s Rep 651.

106  The credit was in fact ambiguous as to whether negotiation was unrestricted (in which case EAB would be a promisee under the credit) or restricted to ABN (in which case EAB could not claim to be a promisee of the issuing bank’s undertaking). The ambiguity lay in a conflict between cll. 6 and 9. However, having regard to the circumstances involved the court held in a related litigation between the parties (reported European Asian Bank AG v Punjab & Sind Bank (N0 2) [1983] 1 WLR 642, esp 656 and 660–661) that the issuing bank ‘unequivocally represented’ to EAB that it was ‘entitled to act as negotiating bankers under the credit’.

107  The principles which an English or Singapore court applies in determining such an application for a stay on the ground of forum non convenience are summarized by Lord Robert Goff in Spiliada Maritime Corp v Cansulex Ltd [1987] AC 460, 474–484; adopted in Singapore in Koh Kay Yew v Inno-Pacif Holdings Ltd [1997] 3 SLR 121, [17]–[18], CA. See also PT Hutan Domas Raya v Yue Xiu Enterprises (Holdings) Ltd [2001] 1 SLR (R) 104, [16]; John Reginald Stott Kirkham v Trane US Inc [2009] SGCA 32, [2009] 4 SLR 429, paras 33–36. Decisions previous to Spiliada and applied in the instant case, European Asian Bank, are MacShannon v Rockwave Glass Ltd [1978] AC 795; Trendtex Trading Corp v Credit Suisse [1980] 3 All ER 721 (CA, Eng.).

108  European Asian Bank AG v Punjab & Sind Bank [1981] 2 Lloyd’s Rep 65, 656 (col 2).

109  European Asian Bank AG v Punjab & Sind Bank [1982] 2 Lloyd’s Rep 356.

110  European Asian Bank AG v Punjab & Sind Bank [1982] 2 Lloyd’s Rep 356, 368 (col 2).

111  See clauses 9 and 10 of the requirements of the credit as reproduced verbatim in the judgment of Stephenson L.J., European Asian Bank [1982] 2 Lloyd’s Rep 356, 358.

112  Cooperative Centrale Raiffeisen-Boerenleenbank BA (trading as Rabobank) v Bank of China [2004] 3 HKC 119 (High Court, Commercial Division, Hong Kong).

113  General Introduction to this work; they include Sirius International Ins Co v FAI General Ins Ltd [2004] UKHL 54, [2004] 1 WLR 3251, 3257–3258; Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 913, per Lord Hoffmann; Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, 771, per Lord Steyn; at 775, per Lord Hoffmann; Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191, 201, per Lord Diplock.

114  In practice letters of credit routinely included clauses conferring such a right on nominated banks, especially negotiating and confirming banks.

115  Council Regulation (EC) No. 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Brussels I Regulation), published in the Official Journal of the European Communities, L 12/1, effective 1March 2002; Chailease Finance Corp v Credit Agricole Indosuez [2000] 1 Lloyd’s Rep 348 (CA, Eng).

116  [1991] I L Pr.(International Litigation Procedure) 411.

117  Unreported, but delivered on 9 December 1991.

118  In consequence, the courts declined jurisdiction over RBS’s right to be reimbursed under the credit.

119  This may have potentially wider implications in situations where the court is determining whether it should grant leave to the claimant negotiating bank to serve its claim form on the defendant issuing bank outside the jurisdiction under para 3.1 (7) of Practice Direction 6B, supplementing rule 6.36, Civil Procedure Rules 1999 as amended by the 51st Update, which took effect on 6 April 2010, and in Singapore under the equivalent provision of Order 11, r (1) (e), Rules of Court, 2006 Edition.

120  European Asian Bank AG v Punjab & Sind Bank [1981] 2 Lloyd’s Rep 651, 656 (col 2); Bank of Baroda v Vysya Bank Ltd [1995] 2 Lloyd’s Rep 87, 91 (col 2); Bank of Credit & Commerce Hong Kong Ltd v Sonali Bank [1995] 1 Lloyd’s Rep 227, 237 (col 2).

121  Centrale Raiffeisen-Boerenleenbank BA (trading as Rabobank) v Bank of China [2004] 3 HKC 119, 140 (High Court, Commercial Division, Hong Kong).

122  [1995] 1 Lloyd’s Rep 227, 237 (col 2).

123  The cases include Habib Bank Ltd v Central Bank of Sudan [2006] EWHC 1767 (Comm), [2006] 2 Lloyd’s Rep 412 (credit expressed payable in London, but denominated in American dollars); Mizuho Corporate Bank Ltd v Cho Hung Bank [2004] SGHC 159, [2004] 4 SLR 67 (credit opened in South Korea and denominated in US dollars, whereas payment is to be made in Singapore); Kredietbank NV v Sinotani Pacific Pte Ltd [1999] 3 SLR 288 (same credit as Mizuho, except that it was issued by a Chinese bank); Credit Industriel et Commercial v China Merchants Bank [2002] EWHC 973 (Comm), [2002] 2 All ER (Comm) 427 (reimbursement under the credit was in France, where the negotiating bank was located, whereas the credit emanated from China in US dollars).

124  J Zeevi & Sons Ltd v Grindlays Bank (Uganda) Ltd, 37 NY 2d 220 esp 226 (1975), discussed and applied in Banco de Vizcaya SA v First National Bank of Chicago, 514 F Supp 1280 (1981), in Canadian Imperial Bank of Commerce v Pamukbank TAS, 166 Misc 2d 647 (1994), and in Cantrade Privatbank AG Zurich v Bangkok Bank, 256 AD 2d 11 (1998).

125  37 NY 2d 220 (1975).

126  37 NY 2d 220 (1975), 226.

127  English courts have no jurisdiction under Part 72 of the CPR 1998 to make a garnishee or third party debt order against a debt situated abroad: see Société Eram Shipping Co Ltd v Cie International de Navigation [2004] 1 AC 260, where many of the relevant cases are discussed and applied by the House of Lords. The same is of course true of an American court: see Fidelity Partners Inc v Philippine Export and Foreign Loan Guarantee Corp, 921 F Supp 1113 esp 1120-21; Wells Fargo Asia Ltd v Citibank NA, 936 F 2d 723 (2d Cir 1991); Intercontinental Credit v Roth, 152 Misc 2d 751 (SCNYC 1990): ‘A New York court cannot attach property not within its jurisdiction’.

128  Princess Paley Olga v Weisz [1929] 1 KB 718; Bank Voor Handel en Scheepvaart v Slatford [1951] 2 All ER 779.

129  Deutsche Bank v Banque des Marchands (1931) 158 LT 364 (CA); R v Lovitt [1912] AC 212, 219. See especially Re Helbert Wagg & Co Ltd [1956] 1 Ch 323, 342–344, where Upjohn J. reviewed some of the decisions on point; Jabbour v Custodian of Israeli Absentee Property [1954] 1 WLR 139, 145.

130  New York Life Insurance Co v Public Trustee [1924] 2 Ch 101, 114, in his concurring judgment.

131  Attorney-General v Bouwens, (1838) 4 M & W 171, 150 ER 1390; Toronto General Trust Corp v R [1919] AC 679, 684.

132  But in all events, as a matter of procedure, the debtor can be sued in any of his several residences. The important thing to note, however, is that if an action is filed against him in a jurisdiction other than that in which the debt is located, the action would be for a breach of contract in neglecting to pay the debt at the location in which payment is promised, with the amount of the debt claimed as damages. On the other hand, if litigation is raised in the locality of the debt, the action is for debt: see New York Life Insurance Co v Public Trustee [1924] 2 Ch 101, 116; Helbert Wagg & Co Ltd [1956] 1 Ch 323, 342, per Upjohn J.

133  Jabbour v Custodian of Israeli Absentee Property [1954] 1 WLR 139, 140.

134  [1981] 2 Lloyd’s Rep. 394 (Lord Denning M.R. and Griffiths L.J., Waterhouse J. dissenting).

135  For the same proposition made in reliance on the Power Curber case, cited in the text: JJ Fawcett and JM Carruthers (eds), Cheshire, North & Fawcett’s Private International Law, 14th edn (London: Sweet & Maxwell, 2008), 1226.

136  Dicey and Morris on the Conflict of Laws, 11th edn (London: Sweet & Maxwell, 1987), 909; 12th edn, 1993 at 928; 13th edn, 2000 at para 22-033; Dicey, Morris and Collins on the Conflict of Laws, 14th edn, 2006 at para 22-033.

137  Order 45 rules 8 and 9, Rules of Court, Cap 322, R 5, Laws of Singapore, 2006 edition. The provisions of the Order regulate garnishee proceedings, especially the grounds for granting garnishee orders, and mirror those established by the Rules of Court of the various Commonwealth countries. They are essentially in the same form as they were originally articulated under Order 45 rules 8 and 9 of the Rules of Court scheduled to the Supreme Court of Judicature Act 1875, and later in 1883 by the Rules of the Supreme Court.

138  Part 72 of the Civil Procedure Rules 1998 (CPR 1998) came into effect on 25 March 2002 and replaces Order 49, which had in turn in 1965 superseded Order 45 without significant modification.

139  It is to be noted that Upjohn J.’s view in Re Helbert Wagg & Co Ltd [1956] 1 Ch 323, 339, that a debt which is not due for payment has no situs does not represent the law to the extent that it is inconsistent with the pronouncements in the House of Lords in Arab Bank Ltd v Barclays Bank [1954] AC 495, 528, per Lord Morton; at 532–533, per Lord Reid; at 535–536, per Lord Tucker; at 539–541, per Lord Cohen. The existence of a debt does not depend on there being a present right to sue for it; a debt immediately due has much a situs as one which is payable in the future: see Arab Bank v Barclays Bank [1954] AC 495; Atkin L.J. in Joachimson v Swiss Bank Corp. [1921] 3 KB 110, 131; Schering Ltd v Stockholms Enkilda Bank Aktiebolag [1946] AC 219. cf. Dicey, Morris and Collins on the Conflict of Laws, 14th edn, 2006 at para 22-028.

140  Under the Bills of Exchange Act 1882 as construed by the courts, an acceptance contract is made at the place where the acceptor’s communication of his acceptance reached the drawer’s hands: s 21 (2); or where he delivered the accepted bill to him: s 21 (1). With regard to judicial pronouncements on point, see Nova (Jersey) Knit Ltd v Kammgarn [1977] 1 Lloyd’s Rep 463 (HL) at 467, per Lord Wilberforce, at 478, per Lord Russell; Hooghly Mills Co Ltd v Seltron Pte Ltd [1994] SGHC 272, [1995] 1 SLR 773, esp at paras 12–15 (High Court, Singapore), holding that the law of that country governs the acceptance contract.